This is a problem: it means we don’t do sensible stuff such as buying life insurance or making wills, leaving our families vulnerable. We don’t save enough for the future, meaning we have to work far longer than we want to, or condemning us to an impoverished old age.
To find out why so many of us behave this way, we talked to behavioural psychologist Paul Davies. Turns out, it’s not just money where we’re our own worst enemy. We are just as cavalier with our health, he says: for example, it can be difficult to get people to take the heart medication that stands between them and ….well…death.
At the root of the problem, says Davies, is a belief that given the right information, humans behave rationally. “This is a misunderstanding about how behaviour happens. We think we are rational and computational and if we have the information, we will do the rational thing. In this scenario, education becomes the intuitive solution to changing behaviour. However, research has consistently demonstrated that the provision of information alone is not an effective way to change behaviour.”
Given half a chance, the brain’s limbic system – its inner chimp (1), if you will – will take control of decision-making. This is bad when attempting to make financial decisions, because the chimp is terribly short-term in its outlook. It is still on the plains of Africa knowing that it has to eat the grub it has found today in case it can’t find a grub tomorrow. For the limbic system, there needs to be incremental rewards to motivate behaviour.
This really affects things like insurance. Davies says: “Life insurance has no rewards because you are dead. The present self is losing money every year, even if it provides for the future security of your partner and children. The limbic system has evolved to favour immediate rewards where it can find them. The need to take what you can now is hard-wired.”
It is up to the more rational parts of the brain to then super-impose a rational explanation for those actions afterwards. The prevailing view is that if we change our attitude, or use willpower, then changes to our behaviour follows. Davies says that the effectiveness of willpower only goes so far. It’s more effective to work to change behaviour without first changing attitudes.
This is uncomfortable for the way the financial industry is set up now. It means financial education programmes aren’t enough. Adjusting the environment to ensure better behaviour is a far more productive way to develop better financial practices. In other words: if you want to stop eating biscuits, move them to a difficult-to-reach cupboard or don’t buy them at all.
The trouble is that when behavioural strategies like this are used by companies, they can smack of coercion and manipulation. The key, says Davies, is to ensure that the goal is agreed to in advance: “Do you want to give up smoking, lose weight, start saving? If you agree to that, we can work to change the environment to get you where you are going.”
It means admitting your limitations, but you can reassure yourself that you’re in good company (with the rest of the human race). ‘Nudge’ technology is helpful – those tools that round up your purchases to the nearest pound and stick them in a savings account or even defaulting to opting in for a Workplace Pension. Davies also champions building personal ‘if then’ statements into your financial planning. ‘If this happens, then I will do this….’ – this can be a useful tool prevent you selling out at times of stock market turmoil, for example.
The best way to make the right financial decisions is to adapt your environment so you don’t have to force yourself. For example:
If you know yourself a bit better, you can make changes.
Paul Davies, Consulting Behavioural Psychologist, will be presenting at the Boring Money Annual Conference on 26th September.
1. Steve Peters, The Chimp Paradox