When it comes to handling our finances, the truth is we’re all like chimps

Time to read: 3 mins

In this guest insight, courtesy of Boring Money, Consulting Behavioural Psychologist Paul Davies explains why our behaviour towards our finances hasn’t evolved quite as far as we would have hoped. Paul will be presenting at the 2018 Boring Money Annual Conference on 26 September, and Octopus Group CEO Simon Rogerson will also be speaking at the conference.

Why we're like chimps with money

We all know what's good for our financial wellbeing, only most of us just don't bother. So, what can we do to kick the procrastination habit?

This is a problem because it means we don’t do the sensible stuff, leaving our families vulnerable.

Behavioural psychologist Paul Davies says it’s not just money where we’re our own worst enemies.

We are just as cavalier with our health. For example, it can be difficult to get people to take their heart medication regularly, even though not taking it could result in, you know, death.

Humans aren’t rational

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... In this scenario, education becomes the intuitive solution to changing behaviour", Davies says. “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, 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.

For the limbic system, there needs to be incremental rewards to motivate behaviour. Take life insurance, for example.

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.”

Use willpower, will you?

The prevailing view is that if we change our attitude, or use willpower, then changes to our behaviour follow. Davies says that the effectiveness of willpower only goes so far. It’s more effective to work to change behaviour without first changing attitudes.

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.

This is uncomfortable for the way the financial industry is set up now. It means financial education programmes aren’t enough. 

The key, says Davies, is to ensure that the goal is agreed to in advance with whoever is providing the service: “Do you want to give up smoking, lose weight, start saving? If you agree to that, we can work to change your environment to get you where you are going.”

Adapt your environment 

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.

  • People find it hard to save but there are plenty of apps that let you invest 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 that you might need. Estate planning, anyone?
  • Take advantage of Free Wills Month to get your will done. The next one starts on 1 October.

If you know yourself a bit better, you can make changes.

About the Boring Money Annual Conference

Boring Money is an independent business set up by investment industry veteran Holly Mackay, to help normal people who don't have PhDs in finance make smart investment decisions quickly and painlessly.

The Boring Money Annual Conference will put consumers firmly in the spotlight and asks how the financial industry can do a better job of engagement and communication with customers. For more information, please visit the Boring Money conference webpage.

Author
Octopus Group
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