Changing financial behaviour for a better future

(Source: Shutterstock)

Here is a dilemma you might face on a daily basis: you tell yourself to watch your diet, but that ice-cream tub in your freezer is calling out to you constantly. What happens next?

You may intend to watch your weight, but the fact you’re tucking into a tub of chocolate delight proves otherwise. You’ve succumbed to a short-term impulse for instant gratification. This disconnect between what you desire and what you do is known as the intention-action gap, according to Professor Dan Ariely, co-founder of the Common Cents Lab. Located at Duke University, this collective of researchers uses behavioural economics to create and test innovative financial solutions.

Temptations like delicious calorific foods might seem secondary, but they are a good example of the intention-action gap, which can have severe implications when it comes to making more important decisions. And one such decision is how and when you are going to save money.

The consequences of the intention-action gap can be seen in the savings habits of the working populations in the United States and Mexico. Although both countries are very diverse, the economic and financial behaviours of workers showcased some similarities — they did not have proactive saving habits and more importantly, were delaying taking up the steps to improve their financial standing and consequently, their future.

America: re-thinking money matters and knowledge

A survey carried out by Common Cents Lab on about 1,000 US citizens classed in the low to middle-income demographic revealed that 36% had less than US$500 in savings — despite all respondents displaying some degree of financial literacy and knowing at least four actions they thought could help them increase their financial assets.

“The reality is that we live in the moment and we make myopic decisions without thinking about the big picture or the long term,” surmises Professor Ariely of such behaviour that reflects the intention-action gap. “The problem is that thinking about money the right way is really, really hard.”

Addressing these financial missteps thus requires solutions that take common behavioural elements into consideration. To that end, the Common Cents Lab is a three-year initiative funded by MetLife Foundation that uses social science to design solutions that help low to middle-income Americans increase their bank balances and savings.

Sometimes those solutions are as simple as offering easy access to understandable platforms. For example, one Common Cents project involves partnering with Retiremap, a firm focused on financial wellness, to create an app that allows easier access to financial planning expertise.

Mexico: strengthening the vision of a comfortable retirement

The intention-action gap is not just prevalent among the citizen pool, but may be evident higher up, in structural policies themselves. Those who design programmes to help the low-income working class may also be unwittingly erecting barriers that hinder access to these much-needed services.

This structural issue is evident in Mexico, which faces low contribution rates towards retirement plans. Employers in Mexico are mandated to contribute to the retirement savings accounts of their workers. Employees themselves and the government deposit a smaller amount. However, even with these contributions, the final amount workers can expect to receive in the golden years ends up being less than 40% of their income.

One way to improve this mandatory savings system is to encourage workers to top up their contributions voluntarily. With funding support from MetLife Foundation, ideas42, a non-profit behavioural design lab, sought insights from key members of the Mexican retirement system to understand and dismantle behavioural barriers that prevent workers from saving more.

The barriers ideas42 identified include uncertainty about the future, a bias towards the needs and desires of the present, a lack of cues in social environments to encourage saving and a low awareness and consideration of this national savings plan.

With a fuller understanding of these impediments, ideas42 also came up with an array of behavioural solutions and recommendations to improve the retirement savings system. “Solutions are most effective when they are designed for people as they really are, rather than as we imagine they might or should be,” stated the researchers in a report of their findings.

These targeted solutions thus include making the act of saving more effortless. Simple examples include the creation of an opt-out system that would otherwise link accounts to paycheques automatically, plus changing how the system and the act of saving for the future has been marketed to the public.

In line with the field of behavioural economics, these interventions supported by MetLife Foundation are less about overhauling financial management systems, and more about tweaking people’s inherent feelings towards finance. When their financial actions are smoothly aligned with psychological, social or emotional factors, solutions that empower people to achieve goals become far more effective in helping them build a financially secure future.

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.