A lot of effort is put into helping people get to grips with their finances, but according to the latest report from the RSA, it’s possible that we’re using the wrong approach.
Governments, companies and educators have made many attempts at providing people with the knowledge to help them gain control of their financial affairs – whether it’s making sure people understand terms such as APR, or helping them to examine the risks involved with different kinds of investments.
However a report from the independent RSA think-tank, Wired for Imprudence: Behavioural hurdles to financial capability and challenges for financial education has concluded that unfortunately, for the most part these kinds of knowledge-based strategies have had limited success in improving how capable people are at managing their money.
Figures from Money Advice Service show that half of people say that they are worried about their finances, with four in ten people saying that they could not easily cover an unexpected bill of £300. Twelve million working age people in the UK face inadequate incomes in retirement and fifteen per cent of UK adults have taken out a payday loan.
Working in partnership with researchers from LSE and the Fairbanking Foundation, the RSA concluded that whilst it is important to provide people with access to the information they need to make good decisions, that simply providing people with more information will not meaningfully improve people’s ability to manage their finances.
The report concluded that there are many more factors that come into play when we make decisions about money - our natural dispositions and thinking patterns are likely to play an important role in how well we manage money day-to-day, how successfully we bounce back from a financial shock, and how successfully we plan for the long-term. The report highlights six behavioural hurdles as being particularly problematic:
Cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.
Empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.
Optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.
Instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.
Harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.
Social norms: we are heavily influenced by the actions of others; while this can be helpful in certain circumstances, it also contributes to the pressure to keep up with the Joneses through conspicuous consumption.
The report acknowledges that economic and political factors play a defining role in people’s financial wellbeing (such as falling wages or changes to the welfare state) but these six behavioural hurdles compound financial challenges and need to be better known. While household budgets will always vary, the value of being financially capable is important to people’s wellbeing, regardless of circumstances.
The report argued that financial capability is more than knowledge of abstract concepts; it’s about skills, choices, and our behaviour when dealing with money. Financial education, however, is often decoupled from the opportunity to practice these skills. One approach, the RSA concluded, might be to develop a financial education programme which is ‘experiential’, shifting the emphasis from knowledge to behaviour, increasing the relevance of the curriculum, and providing the opportunity to practice the skills being learned.
The report said that where financial education is provided as an elective, outside of a given curriculum, it can be difficult to ensure that people show up, perhaps due to inertia or to the stigma which may be attached with attending such a course. It recommended that financial education should be taught early on in life, and reinforced at key points someone’s life - such as planning for a wedding, or moving into independent housing.
Commenting on the report, RSA Senior Researcher at Social Brain Centre, Nathalie Spencer said:
“The economic conditions of the past decade have put UK household budgets under pressure, and many people are struggling financially – whether that’s trouble making ends meet, dealing with unexpected expenses, or being prepared for the future. What’s more, some of our natural dispositions can actually undermine our ability to manage money well; we call these the behavioural hurdles to financial capability. It is tempting to respond to these challenges with calls for more financial knowledge – the argument being that as long as people are better informed, they will be financial capable. Our research, however, has shown that this is not always the case. We suggest that supporting people in developing effective strategies to work with our behavioural hurdles, and providing the opportunity to practice those strategies and skills, may be more productive in the long-term.
Professor of Behavioural Science, London School of Economics and Political Science, Paul Dolan said:
“Behavioural science teaches us that most of what we do simply comes about rather than being thought about. We are influenced more by the context of our decisions than the cognitions of our minds. We act on emotion and impulse, sometimes in ways that improve our wellbeing but other times to our detriment. These lessons are now making their way into many areas of application. Being good with money does not come naturally to some people and the options in an information and opportunity rich world can seem daunting to most of us. More and better information can only get us so far, and not very far at all in fact. We need behaviour change programmes that go with the flow of human decision-making rather than trying to get us to swim against the tide.”
Antony Elliott OBE, CEO, The Fairbanking Foundation said:
“Financial capability in the UK is too low and the effectiveness of financial education needs to be improved. I hope this report will stimulate all involved to rise to the challenge and lead to many more controlled trials.”
Notes to editors
- For more information contact RSA Head of Media & Public Affairs Luke Robinson on 020 7451 6893 or 07799 737 970 or [email protected]