Given the risk of human bias, the fear of dispassionate artificial intelligence giving us advice based on algorithmic data is, surely, counter-intuitive.
The Pensions Regulator should be welcoming robo-advice.
The regulatory risk of poor or inappropriate human advice being given when the market has been unable to expand with sufficient speed to meet demand, is very high.
There is a growing body of psychological research around decision making which refers to two systems of thinking.
Given the enormous demand of those who will need to make decisions about retirement income, it is vital that low cost bandwidth is made available.System 1 which is fast, intuitive - like how to drive a car and how to brush your teeth.
System 2 is slower and more process-driven, requiring the decision maker to weigh up the evidence and ideas available as well as the emotional (conscious and unconscious feeds) in order to make a decision.
System 2 thinking can be stressful and demands significant ‘bandwidth’ (a term used for the capacity for thought).
We know that system 1 thinking on big decisions, such as what to do with your accumulated pension, can be very dangerous. However, system 2 thinking demands bandwidth which many simply do not have or are unable to commit.
The Behavioural Insights Team believes bandwidth is significantly reduced as a result of concerns around debt, poor health and noise from the living conditions for the disadvantaged.
As a computer’s performance is reduced when you run too many programmes, the multiple dimensions of poverty and disadvantage sap mental processing capacity, which in turn affects judgement and decisions (Kaplan & Berman, 2010; Mullainathan & Shafir, 2013).
And, of course, in the absence of financial cushioning a wrong decision has the largest impact.
The Citizens Advice Bureau claims that consumers’ bandwidth is particularly low at the point at which decisions are being made about retirement income.
“Many [consumers] are thinking about caring for parents, children or grandchildren, including those in the ‘sandwich generation’ who are considering multiple generations.
"Our quantitative research shows that some have key hopes to travel (51 per cent) and relax, while also having major fears about health (73 per cent) and money.”
So with reduced bandwidth consumers fail to consider their own frailty in retirement and the financial needs associated with it.
In this instance, surely it is better to subcontract the research element around decision making to a robo-adviser?
Three in five consumers expect to take expert help when making a decision about how to withdraw their DC pension savings.
Given the enormous demand of those who will need to make decisions about retirement income, it is vital that low cost bandwidth is made available.
The only way to create the scale of help and advice necessary to increase bandwidth for the mass market is via an automated, artificial intelligence service.
Dirk Paterson is director of the Corporate Comms Shop
