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The Power of Simplicity in Financial Communication

In the realm of financial communication, the power of simplicity cannot be overstated. Investors, as it turns out, are more attracted to straightforward language with short sentences. Complex writing, laden with jargon and convoluted sentences, tends to be off-putting and dull. This preference for simplicity is not just a matter of taste, but a neurological fact.

Financial Communication

The Neuroscience of Simple Writing

Neuroscience research has shown that the human brain responds more positively to clear and simple stimuli. When presented with complex writing, the brain does not release the pleasing neurochemicals that motivate people to read further. On the other hand, clear and simple writing triggers a release of dopamine and other chemicals that engage readers and keep them reading.

The Financial Benefits of Clear Communication

The financial benefits of clear communication have been observed over the years. Clear and direct writing in financial disclosures can attract more investors, reduce the cost of debt and equity, and even save money and time on audits.

A landmark experiment in this field demonstrated the negative consequences of poor corporate writing. The study found that companies risk losing readers due to the low "processing fluency" of their documents, a measure of readability used by psychologists and neuroscientists.

The Real-World Impact of Complex Writing

Subsequently, the harm associated with overly complicated writing in real-world markets. For instance, one study found that investment funds with annual reports burdened by a drop in readability exhibited a significant reduction in market value.

The cost of poor writing stems from how the brain works. Good writing triggers a release of dopamine and other chemicals that engage readers and keep them reading. However, despite the clear benefits of simple writing, many companies seem to be ignoring its power, with disclosures becoming more complicated over time.

Improving Readability: Tips and Tricks

Tips to improve the readability of disclosures. These include:

  1. Using Strong Verbs and Nouns: Adverbs and adjectives often disrupt clarity. Using strong verbs and nouns can make the message more direct and understandable.

  2. Splitting Up Complex Thoughts: Complex thoughts and long sentences can be confusing for readers. Breaking them down into simpler, shorter sentences can improve readability.

  3. Minimizing Hedging: While every argument has exceptions and every topic demands context, it's important to minimize hedging to maintain clarity and directness.

  4. Removing Extraneous Wording: With each new draft, it's important to go back and strip out extraneous wording that doesn't add value to the message.

  5. Keeping it Short: It's crucial not to write more than your audience needs. Keeping the content as short as necessary can maintain the reader's interest and prevent information overload.

The principle of simplicity in financial communication is clear: the simpler the words, the higher the payoff. By embracing this principle, companies can improve their communication, attract more investors, and ultimately increase their profits.


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