Tips for Better Communicating Risk

We receive information about risks with a healthy degree of regularity. Just this past weekend, for instance, I took in some standard risk information about the weather (13% chance of rain in Los Angeles), the ocean (a “danger” of rip currents), and the chance that the Red Sox would beat the Guardians (about a 70% chance).

At least, those were the bits of risk information that stood out to me. I’m sure many other risk communications went unnoticed; certainly, I wouldn’t have paid attention to the original email about the air conditioning going out if I weren’t slated to teach a classroom full of students several days this upcoming week.

Clearly, I’m not alone in being on the receiving end of risk communications. Whether it’s the weather, sports, politics, finance, or health, we’re inundated with information about the likelihood that something will or will not happen. But we don’t just receive information about risks: We often provide information about risks. And that is especially true if we are in the business of communicating information about uncertain or unknown events to clients or partners.

Doing so in the best way possible doesn’t have to be a guessing game. For decades, psychologists have been studying the optimal ways to communicate risk. Before I dig into some best practices, it’s worth noting that, generally, people aren’t rational robots who can simply parse numerical information and decide on an ideal course.

On the contrary, researchers have pointed out that risk considerations can boil down to cognitive calculations and affective — or emotional — reactions.¹ In times of uncertainty, feelings such as dread, worry, optimism, fear, etc., can play a key role in what actions people decide to take.²

If people often use their feelings as a source of information about risk, then simply giving probabilities and numeric information may not go as far as we want. In a recent article, psychologist Ellen Peters and her colleagues provide four solid strategies for better risk communication.³ As a caveat, their work focuses on how best to communicate risks surrounding natural hazards. That said, the lessons are informed by and apply to many other domains, such as finance and health.

Four Strategies to Communicate Financial Risks More Effectively

1. Use numbers.

Experts may sometimes shy away from numbers, fearing they will be misinterpreted. But labels such as “low, medium and high” risk can carry different meanings to different people. Could information be conveyed using a number? Rather than saying, “there’s a high likelihood that your current savings rate will result in amassing college tuition by the time your child graduates high school,” you could say, “80% of clients saving at your current rate can expect their college savings accounts to be fully funded by the time their child graduates high school.”

2. Make numbers more manageable.

We’re simply not equipped to grapple with large numbers, so we should translate risks into smaller, more manageable bits of information. One research study found that explaining that a given policy would cost $24,000 per individual, compared to $2 trillion overall, resulted in more sensible responses when assessing such government programs.⁴ Applied to financial risks, fees for a given investment could result in $250,000 over 30 years (large, hard to comprehend) or fees could result in roughly $7,000 every year, or a vacation (smaller, easier to grasp).

3. Make numbers meaningful.

Translate percentages into frequencies: Instead of saying “there’s a 10% chance that market movements will cause a drop in your portfolio this year,” say, “One in 10 clients in a similar situation would experience a portfolio loss.” One in 10 is more concrete and better representative of how people naturally think about risks.

4. Pair stories with data.

Stories are powerful tools of communication, and they can certainly be better received than rote statistics. However, recent work has found that stories alone may be persuasive but not necessarily result in increased scientific reasoning. Although this is an ongoing area for research, a better strategy may be to provide anecdotes and stories but also back them up with statistics.

Boosting Financial Literacy: The Role of Numerical Skills and Confidence

The four strategies I reviewed go a long way toward communicating information about risk more effectively. However, an important caveat needs to be mentioned: People may differ in their ability to deal with numbers and their confidence in doing so.

The best outcomes — when people receive information about risks and act on that information appropriately — occur when both numerical ability and confidence are high.⁵ But when there is a mismatch, it can be problematic. For example, someone low in ability but high in confidence might persist with a numerical task but make costly mistakes along the way.

Advisors working with clients can’t administer math tests to gauge numeric ability, but they can look for other subtle indicators of ability. Do clients naturally grasp financial concepts, such as compound interest, or struggle to understand?

To assess confidence, do clients like to look through spreadsheets and other materials, or do they defer to the advisor or other authority figures immediately? Do they ever utter, “Oh, I’m just bad with math.”

The lesson here is that improving numerical abilities or numerical confidence may not be enough to help ourselves or others achieve the best outcomes. Rather, helping to improve both ability and confidence may be the best way to ensure that risk communications are well-received.