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How do Financial Literacy and Confidence impact Investment Decisions in Young Investors?

Independent Design Research on
Financial Literacy and Investor Behavior

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During my third semester at Parsons, I took the challenge to dive deep into uncovering the mental models, habits, motivations and barriers to learning about investing among people who have just started to earn in the US.

This case study is a summary of my research process and is aimed at identifying key opportunity areas to develop as a design solution for my capstone in the final semester of my course. 

TEAM
Soumil Panwar

COURSE INSTRUCTORS
Putri Trisulo

DURATION

4 Months

DESIGN RESEARCH

Retail Investing

Wall Street in New York trades over $212 Billion every day.

Retail investing directs to a process in which public funds are aggregated by investment banks, brokers and hedge funds to invest in publically trading companies. These companies are listed on various stock exchanges like the NASDAQ, NYSE, etc.

This individual investment grows with various companies and revenue generated by various companies is shared among all the shareholders (investors).

 

SYSTEMIC BARRIERS

Investing is Aspirational

1

Investments are Risky
Investments involve direct financial risks

2

Learning is Ambiguous
There is no certain way of learning to invest

3

Learning Systems are Ineffective
Finance is not taught in schools directly

Design Process

I approached this project using a modified version of the '4D' model in design research.

Scope definition, secondary research, identifying target audience, framing initial hypothesis, identifying a key research question and defining research objectives

Conducting in-depth qualitative interviews with financial experts and investors

Defining investor journeys,  affinity mapping, sense making of qualitative data using investor archetypes

Conducting insight framing workshops, refining insights and identifying design opportunities

Define

DEFINE: SECONDARY RESEARCH

Financial Literacy Lacks Confidence 

Research in behavioral economics suggests a host of psychological, emotional, and cultural factors drive an individual’s financial behavior. These factors contribute to an investor's confidence, which when coupled with improved financial literacy could possibly affect decision-making positively.

 

I directed my research into uncovering this qualitative confidence in making investment decisions which has the potential to equip an investor to bring the most value out of their investments.

LITERARY DEFINITION

"Financial literacy is the ability of an individual to understand and effectively use various financial skills to make informed financial decisions."
-Hung, Angela and Parker, Andrew M. and Yoong, Joanne, Defining and Measuring Financial Literacy (September 2, 2009).

FINANCIAL EDUCATION

FINANCIAL LITERACY 

FINANCIAL BEHAVIOR AND DECISIONMAKING 

CONFIDENCE

Confidence and financial literacy can lead to good investment decisions.
FRY, AARON, JENNIFER WILSON, PRISCILA SOBERANES, CAROL OVERBY, and FERNANDA FLORES. “Designing Materials toward Changing Financial Behavior.” The International Journal of Design in Society, 2018.

Financial Planning Guides Learning

  • Retirement security and growing wealth are primary motivators for individuals (average age 48) to invest money.

  • The presence of financial goals in the life of an investor is the first step to the development of their investment behavior.

  • Financial goals create a sense of purpose and influence the way individuals approach learning about investing.

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 Financial goals of 574 investors actively working with
professional financial advisors in the US. 

Scholl, Brian, and Angela A. Hung: US Securities and Exchange Commission.

Social Media Lacks Reliability

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Financial learning systems mapped across popularity and reliability

Access to information in modern times is critical to where people go in order to educate themselves.

  • Digital consumption of data brings the potential of scale but brings a lack of trust reasoned to influencer marketing patterns in the marketing space.

  • Content on social media is often biased and polarized to the interests of sponsors and reflected in subtle ways. 

  • Traditionally, financial advisors offered by banks have been a source of financial advice to the elder population. 

Market Landscape

 

There are a number of solutions to financial literacy in the market, some with a focus on savings and personal finance while some with a focus on investing.

 

  • Traditional solutions: Focus on coaching with professional advisors, hypothetical stories and short-term finance courses.

  • Recent solutions: Focus on gamification for habit building, community knowledge sharing for trust building, simplifying finance using bite-sized consumable information and investment simulations.

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Existing solutions to financial literacy in the market mapped across
focus areas and extent of innovation.

Target Audience: Young Investors

Individuals are intimidated by finance when they start to make money. This is a major life transition.

Knowledge about investing can help an individual make rational and healthy investment decisions for life. 

 

Age: 18-29 years

 

Characteristic: Early career professionals with access to money but a lack of confidence in investing and personal finance. Transitioning into the professional world.

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KEY RESEARCH QUESTION

Exploring the Role of Confidence and Financial Literacy in Investment Decisions by Young Investors

RESEARCH OBJECTIVES

Learning
How do young investors learn to invest?
How do they make sense of data?


Confidence
What is the source of confidence in young investors?
How do they build trust in financial advice from various sources?


Decision-making
How do external factors impact decision-making for young investors?
How do past experiences, financial goals, and family relationships with money affect financial decision-making?

DISCOVER: QUALITATIVE RESEARCH

Discover

With an aim to gain a multi-dimensional perspective of the problem space, I conducted in-depth interview sessions with financial experts and investors. This helped me gain a deeper understanding of the barriers and mental models around investing. 

4

Expert Interviews 

  • Financial Literacy

  • Financial Policy

  • Investment Banking

  • Financial Technology

12

Retail Investor Interviews

  • 5 Student Investors: Income $25,000-$80,000

  • 5 Early-Career Investors: Income $80,000 +

  • 4 Mid-Career Investors: Age 29 years+

Expert Interview Summary

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Brett Barndt
Researcher in financial publishing since 1980's

Humans have an emotional relationship with money, they lack focus towards the future



"Financial literacy is a reactive adaptation to a flawed financial system"

KEY TAKEAWAY #1

Investing in the impact rather than a company can promote sustainable economic growth of the society 

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Teressa Ghilarducci
Labor economist and author in retirement securities
 

Financial literacy depends on motivations tied around life events, risk-taking potentials, and informal learning from friends and family


"Savings should not be a luxury but a part of everyone's living expenses"

KEY TAKEAWAY #2

The temperament of saving regularly precedes investment behavior and decision-making.

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Hrishikesh T.
Ex- Investment consultant JP Morgan and Morgan Stanley
 

Human nature overpowers technical/ financial skills. Efficient capital investments in good sectors promote the economic growth of a society.


"Financial terminology is complex and intimidates people"

KEY TAKEAWAY #3

Personal finance goals of an individual determine their risk-taking capacities.

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Mayank M.
Ex- Director of Engineering Uber, Afterpay and Square
 

Fin-tech giants have capitalized on market bubbles in the economy during high-demand market crashes.


"Financial literacy is not an immediate problem as it does not generate direct revenue"

KEY TAKEAWAY #4

Financial literacy programs for young investors do not lead to customer acquisition in the long run.

Investor Interview Summary

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REDEFINE: SENSEMAKING OF QUALITATIVE DATA

Redefine

Investor Archetypes

Emotional relationships with money are formed at different phases in life. 

The investor interviews highlighted behavioral patterns that emerge from past experiences with money, often as a family unit. I mapped out the emotional symptoms that lead to confidence building at various phases in the life of an investor. This map is a representation of real experiences and learnings from the investor interviews.

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Confidence is emotionally tied to life experiences.

Student investors showed a higher level of confidence when asked to rate their confidence in investing on a scale of  1-10 during the interviews. I mapped confidence levels across these archetypes to understand their source and impact on investment behavior.

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DEVELOP: BUILDING INSIGHTS AND OPPORTUNITIES

Develop

Insight Framing Workshop

I conducted an insight-framing workshop with a set of 12 designers by sharing user stories of different outlier investors that I found during the interviews. The participants worked in teams to identify motivators and enablers to key behavioral observations within the user stories.

 

This workshop helped in refining observations from research and framing quality insights by leveraging abductive reasoning.

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Insight 1

FINANCIAL LITERACY IS LOST IN GREED

The urge to make money fast takes over the rationality of financial literacy. Social media creates a bubble of pseudo-confidence and results in investors taking financial literacy for granted, leading to impulsive and risky investment decisions.

"I coached over 100 investors. After talking to them after 2 years, most of them had lost money because of some tip they got from social media and I gave up on my investment coaching sessions."

 

-Investment Consultant, JP Morgan Chase, and ex-Morgan Stanley

"I invested heavily in crypto during the pandemic. The returns from this helped me move to NYC for my education."

 

-Rashad Williams, The Experementor

Identified Opportunities

How Might We

Build a savings first temperament to make personal financial planning a priority and motivate investors to invest towards long-term gains?

1

Buying Wealth

Immagine investments as a commodity to acquire and possess. Teenagers can possess investment cards as milestones for their investments to keep as collectibles.

2

Making Investments Material

Tying banking rewards to balanced/ healthy investments proportional to one's income. Banks could upgrade reward points and add stars to student debit cards.

3

Tipping Yourself

Similar to tipping while you spend at a restaurant, pay tips in the form of investments to yourself while making necessary expenses like paying your rent can make investments a part of expenses.

How Might We

Enable access to quality learning content on social media by leveraging peer-to-peer and collective learning?

1

Peer Learning

Peer-to-peer knowledge exchange platform to collectively learn and share experiences.

2

Instagram for Investing

Social media connects communities. Leveraging the power of social media to create investor communities and learning opportunities with financial experts.

3

Game of Investments

A board game to help friends and families learn about investing from each other's approaches to managing money and building their own financial and investment plans

Insight 2

RESPONSIBILITY STREAMLINES PERSONAL FINANCE

Anticipation of future responsibilities leads investors to streamline their personal finance and make long-term investments to take care of future responsibilities.

"Don't make savings a luxury, make it a part of your living expenses"

 

-Teresa Ghilarducci, author and an expert in retirement securities

"RSU's at Amazon have motivated me to start investing to have enough to survive for 6 months if I lose my job. I have started to become mindful of my expenses and try to invest as much as I can for the future."

 

-Aditi, SDE at Amazon, The Rational

Identified Opportunities

How Might We

Help investors prepare for upcoming future responsibilities in order to bring awareness of financial goals early in their lives?

1

HR Induction Programs

Financial induction for fresh graduates around personal finance, investing and financial health in the form of workshops.

2

Universities make Finance Fun

Board games and fun workshops for students within college campuses are directed towards simplifying the complexities within the financial landscape.

3

Fantasy Investment

Positioned as a 'Fake Wall Street' young investors can exchange small denominations of money into a fantasy world of investing. The platform first educates investors experientially by investing fantasy money into real companies while earning rewards and returns on their real investments with us.

Insight 3

FINANCIAL LITERACY LACKS THE ABILITY TO TRANSFORM

Investment decisions are driven by monetary gain. Investors ignore the larger influence of their capital investment on society.

"Financial literacy adapts to fundamentally flawed financial systems. Wall Street does not fund half of the small-scale businesses with the potential to put public money to better use for society. "

-Brett Barndt, Researcher and expert in Financial Literacy

"My duty in being in the profession is not to make money for my clients, it is to do efficient capital allocation to the good sectors because that's how the economy is going to grow. If I invest in good companies, they will grow and the economy will grow."

 

-Hrishikesh T, Investment Consultant, JP Morgan Chase, and Morgan Stanley

Identified Opportunities

How Might We

Help investors realize the power of their investments to contribute towards bringing transformative social influence on society.

1

Shark Tank of Wall Street

A smaller-scale Wall Street that only invests in small businesses working toward high societal impact

2

Investing in Impact Rather that Companies

Bucketing tool for investment platforms to help retail investors realize the impact of their investments to the world and make future-driven capital allocations.

3

Making Impact Tangible

Playing the role of sustainability analysts, we quantify the impact of companies and guide investors toward making future-focused investments

Overview of Identified Opportunities

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Next steps.... (To be continued in the IS2 course in spring 2023)

I concluded my research with these opportunity areas and would partner with financial experts and institutions to build, prototype and test possible solutions to create a larger impact to this problem space in my next semester for the IS2 course.

Key Learnings

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Insight framing is an art! 
When framing research insights, it is helpful to superimpose assumptions from secondary research and observations from primary research with behavioral triggers and motivators to bring out unbiased insight statements.

Biases are mousetraps!
Working alone on a project of this scale has risks involved in the form of inducing biases. I learned the value of bouncing ideas with peers, leveraging expert interview sessions early in my design process and not losing focus on the larger problem space, helping me through this exploratory journey of discovery and self-discovery.

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