Quantcast
Menu Off Menu On

Why we're like chimps with money - an interview with Paul Davies

12/08/2018

paul davies.jpg

We all know what we need to do with our finances. Spend less than we earn, save for a rainy day, make sure our family is protected. Did I lose you for a moment there? Did your brain suddenly start to go ‘yada yada yada’? Turns out you’re not alone. We all know what’s good for our financial well-being, only most of us just don’t seem to get around to doing it. Why is that? What will help us kick the procrastination habit and actually get some of this stuff done. 

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’re going to take out a mortgage, take the option to buy life insurance at the same time. Most companies offer this at a discounted rate and it’ll add a tiny bit to the mortgage payment; hardly enough to notice.
  • Sign up to an app like MoneyBox that saves and invests for you in small increments that you don’t really miss at the time.
  • If you’re employed, don’t opt out of auto-enrolment unless you have an existing pension set up.
  • Use times when you HAVE to engage with finance, like doing your tax return, to look at other services your accountant provides. Estate planning anyone?
  • Take advantage of Free Wills Month to get your will done. The next one starts on October 1st, 2018.

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

Don't know where to start?

We'll test your basic financial fitness and report back with a scorecard. What's fit, what's flabby and how to shape up. 

Create your financial fitness plan

Related Questions

Got a Question?

  • Hello, I already have a workplace pension. Can I also have a private pension? If so, I have a LISA as well. Can I have all three in place?

    Precious | Surrey | 23/05/2019 | 0

    • Private Pension
    • Lifetime ISA
    • Pension
    • Workplace Pension
    Phoebe Smith's Response

  • I am a self-employed 55 year old, with only a state pension. What can I do to increase my money for retirement?

    Sandra | Dumfries and Galloway | 21/05/2019 | 0

    • Private Pension
    • Stocks and Shares ISA
    • Lifetime ISA
    • State Pension
    • Pension
    • Workplace Pension
    Helena Wardle's Response

  • We have just retired to France. Our pensions cover our expenses but we also have £230k which we would like to invest for a monthly income. Could you please explain the low-risk options we might want to consider?

    Keith | France | 10/05/2019 | 2

    • Private Pension
    • Stocks and Shares ISA
    • Online Investment Platforms
    • Pension
    David Stone's Response

  • When I retired in December 2018, I considered consolidating my pensions for income drawdown, but it meant handing over management of the investments. After viewing the performance of the funds the Standard Life Active Retirement pension invests in, I hesitated. Recently I spoke to an advisers aligned to the investment philosophy of Albion Strategic Consulting headed by Tim Hale, but was scared off again by the messages regarding DIY investor dealing with re-balancing, sequencing, and lack of ability to stress test without the correct professional financial software, in addition to the high costs. I understand the basics, but am now totally unsettled as to the direction I should take and if, at such a critical stage, I should invest in an IFA on a regular basis. I appreciate you cannot give me direct financial advise but I am finding the whole event very disconcerting, when I thought I had the basic acumen to manage the transition.

    Rob | Hertfordshire | 20/03/2019 | 3

    • Private Pension
    • Pension
    Holly Mackay's Response

  • If my son increases his pension contribution, I have read it may affect the amount he can borrow on a mortgage. Is this correct? Should he take a SIPP out as well? Is there any advantage in maxing out his managed Nutmeg Lifetime ISA in the next financial year?

    Richard | Hertfordshire | 06/03/2019 | 3

    • Private Pension
    • Stocks and Shares ISA
    • Lifetime ISA
    • Pension
    • Mortgage
    Holly Mackay's Response

  • I am 65 and still working. I have a workplace pension, which was closed and replaced with a retirement saver pension. I contribute to this via salary sacrifice. I also have a personal pension serviced by an IFA. Should I move my personal pension fund to a SIPP provider at this late stage of my life? I would like to consolidate the workplace retirement saver and personal pension fund together and manage it myself.

    Den | South Yorkshire | 27/02/2019 | 0

    • Private Pension
    • Pension
    • Workplace Pension
    Helena Wardle's Response

  • Trying to get a bit more pro-active with my pension. If my money had been in an online managed fund like Nutmeg for example, is it reasonable to assume that as the markets fell last year the funds would have been managed in real(ish) time to limit the damage? If so, is it therefore a no-brainer to transfer my pension to an online managed pension or is it not quite as simple as that?

    David | London | 08/02/2019 | 2

    • Private Pension
    • Robo Adviser
    • Pension
    Lesley James's Response

  • Hello, I really enjoy your website and find it useful and concise. My question is, what is meant by long term savings? I am 54, so what should I consider to be an appropriate time frame for any investment I make, that could supply the best results?

    Jennifer | Essex | 16/01/2019 | 9

    • Online Investment Platforms
    • Funds
    • Pension
    Anna Sofat's Response

  • I have an old pension and they have written to me saying that they are going to enhance my pension if I transfer it out. The company is also offering free independent advice. I have £117,000 in the pension at the moment, which would give me £6400 a year at 65. I am 61 in April and would like to finish work at that point. I am not sure how much extra they will give me. Have you any ideas or suggestions to help me decide? Thanks.

    Nicholas | Carmarthenshire | 04/01/2019 | 0

    • Pension
    • Workplace Pension
    Lesley James's Response

  • My wife and I have recently separated. The equity in the house is going to be split 50/50. We don't have any other meaningful assets. We have agreed to co-parent the children equally. My wife is requesting that I pay child maintenance, child care and school expenses. A CMS document states that shared child care results in no child maintenance payments. However, I do agree with the child care and school expenses payments. Our daughter has Autism Spectrum Disorder, so my wife gets a Disability Living Allowance for her and also works full time. If I don't pay the child maintenance, child care and school expenses, my wife is threatening to claim spousal maintenance, and take half my pension. Should I pay the £350/month or take my chances in court?

    D | Lincolnshire | 03/09/2018 | 0

    • Pension
    • Other
    Catherine Morgan's Response

  • I am 73 and cautious. There are two areas that your advice would be helpful..what if you just spend thousands on buying the gold standard footsie companies like shell and the rest and keep them for five years and then cash them in ?

    DB | UK | 24/07/2018 | 6

    • Robo Adviser
    • Online Investment Platforms
    • Funds
    • Pension
    Holly's Response

  • My wife needs to set up a SIPP with a good value, low cost, low maintenance underlying investment portfolio. We want a good mobile app from a well respected provider. Where can we see the options and directly compare historic returns so we can make a decision?

    Guy | HRT | 17/07/2018 | 1

    • Private Pension
    • Pension
    Richard Allum, MD, The Paraplanners's Response

  • I was considering applying for Individual protection 2016, which I understand would give me an LTA of £1,021,390. However, following the Inflation rise of LTA, it seems the LTA is now at £1,030,000. It now seems pointless applying for Individual protection 2016. Have I got this right?

    David | LDN | 12/06/2018 | 0

    • Pension
    Richard Allum, MD The Paraplanners's Response

  • Hi, If I take a lump sum from my pension at age 55, what is the rate of tax after the first 25%?

    Judy | 17/05/2018 | 1

    • Pension
    Helena Wardle, Certified Financial Planner's Response

  • How long does it take to release money from your pension at 55 years old?

    Diane | WYK | 01/05/2018 | 1

    • Pension
    Helena Wardle, Certified Financial Planner's Response

  • Do you have information on taking your pension pot before retirement? My husband is 62, on a final salary scheme & is trying to get clear information on it.

    Jo | 17/04/2018 | 3

    • Pension
    • Workplace Pension
    Helena Wardle, Certified Financial Planner 's Response

  • Hi, I've got an old D.B. pension, approximate value £12k. I would like to invest & top up each month. Who would you recommend? Also I would like to make an investment, & don't know where to start? Thanks

    Eve | 04/04/2018 | 5

    • Funds
    • Pension
    Helena Wardle's Response

  • My question is about my wife's pension valuation in a divorce situation. She is on a final salary scheme working for a national charity organisation. I feel the CETV value is too low and certainly does not take into account the inbuilt benefits such as guranteed final salary, life insurance.

    Jay | 12/02/2018 | 0

    • Pension
    Richard Allum's Response

  • I am a 59 yr old retired lady with no income but I have reasonable equity..is it worth starting a pension or is it too late?

    | 06/02/2018 | 2

    • Private Pension
    • Pension
    Boring Money's Response

  • Hi, If I take a lump sum from my pension at age 55, what is the rate of tax after the first 25% ??

    Gareth | HAM | 26/01/2018 | 0

    • Pension
    Helena Wardle, Certified Financial Planner's Response

  • Can losses in a pension SIPP be offset against anything?

    Henryk | HAM | 17/01/2018 | 0

    • Private Pension
    • Pension
    Cherry Reynard's Response

  • I am a 59 yr old retired lady with no income but I have reasonable equity..is it worth starting a pension or is it too late?

    LL | NFK | 10/11/2017 | 2

    • Private Pension
    • Shares
    • Pension
    Cherry Reynard's Response

  • If I were retired and drawing my pension, can I earn an income from doing some sports coaching too? If so, how much can I earn without it affecting my pension? Thanks

    Charlotte | DEV | 07/11/2017 | 0

    • Pension
    Boring Money's Response

  • Please help me. Choosing a pension from Aviva. It asks if I want growth or income? Which one do I choose ? I'm 46 .

    Ria | Greater London | 11/09/2017 | 8

    • Private Pension
    • Pension
    Holly Mackay's Response

  • I've got £20,000 from an endowment policy (astonishing, I know), and I'm looking into how best to invest to get a reasonable return without excessive risk. Any thoughts much appreciated!!

    Penny | Peterborough | 09/08/2018 | 1

    • Stocks and Shares ISA
    • Cash
    • Online Investment Platforms
    • Life Insurance
    Danny Cox's Response

  • Why should I bother with paying into a pension at my age of 55 years now when I have never had one?

    Tee | Greater London | 07/09/2017 | 4

    • Private Pension
    • Pension
    Cherry Raynard's Response

  • Can I sort a pension out myself online?

    Sharon | Greater London | 07/09/2017 | 0

    • Pension
    • Workplace Pension
    Danny Cox's Response

  • How much should I insure my life for?

    Femi | Greater London | 07/09/2017 | 0

    • Life Insurance
    Holly Mackay's Response

  • What might a savings pot of £100,000 get me as a retirement income?

    Aboodi | Greater London | 06/09/2017 | 1

    • Pension
    Holly Mackay's Response

  • Pensions vs ISA - which one is best?

    Roderick | Greater London | 06/09/2017 | 0

    • Stocks and Shares ISA
    • Junior ISA
    • Lifetime ISA
    • Pension
    Holly Mackay's Response

  • How much does life insurance cost?

    Christina | Greater London | 06/09/2017 | 0

    • Life Insurance
    Holly Mackay's Response

  • What are the changes with pension annuities? My mother in law has asked as her retirement is looming. I've read in the press it's changing but it all feels confusing. I just need some simple clear advice. Thanks

    Keith | Greater London | 06/09/2017 | 2

    • Private Pension
    • Pension
    Cherry Raynard's Response