Financial capability and the power to create

Providing a financial safety net and improving financial capability enhances our power to create, as people are more likely to act on their ideas, explains behavioural scientist Nathalie Spencer

By Nathalie Spencer

Follow Nathalie on Twitter @economiclogic


Being overstretched is not fun. It can feel as if adding one extra complexity, task or expense to an already long list might just be the straw that breaks your back. Consider the trade-off between putting food on the table or acquiring new shoes for your child’s growing feet. How could someone in this situation find the capacity to care about much more than just getting by?

In this light, to have the ‘power to create’ looks like a luxury. Yet, as the RSA believes, having the power to create — the ability, opportunity and inclination to act on ideas about how to improve our own situation and that of our community — is a vital component of a thriving, flourishing life. So how can we ensure that people are afforded the means to nurture this power in their own lives?

How financial duress happens

Lacking financial wellness is not a symptom of flawed character. We are all susceptible to financial hardship. Yes, some people make very imprudent spending choices, rack up unnecessary debt, or try to game the system. But many people have good intentions, work hard and have natural talent, yet are still swayed by certain human socio-psychological tendencies to mismanage their money, or fall prey to simple bad luck.

Cornell University professor Robert H Frank elegantly outlines the role of luck in our lives in his 2016 book, Success and Luck. Frank argues that we are currently in a ‘winner-takes-all economy’, where improved communications and transport infrastructure have paved the way for global trade. He describes how today’s economic rewards are not distributed as evenly as they were several decades ago, when there were naturally smaller marketplaces. With fewer, bigger winners, the consequences of not being ‘the best’ globally are higher — for both businesses competing for consumers and individuals competing for careers — and inequality is accentuated.

In this economic environment, while hard work and talent are still determinants of success, Frank argues that we tend to underappreciate the role that luck plays. This may be partially due to various cognitive and psychological biases, where successful people attribute their status to elements that are within their control. Additionally, it seems emotionally easier to believe that the world is a just place. There may be an evolutionary advantage to believing in a just world, in that it provides motivation to work hard and develop skills. Otherwise, why bother? Strong fatalism reduces the incentive to get out of bed in the morning. Nevertheless, the extent to which we recognise the role of luck or chance is important.

When primed to consider the role of luck in their success, people are more generous to others. And when primed to think about how their personal actions, skills and other factors within their control contributed to their success, people are less generous, as compared to a control group. Therefore, Frank suggests that the extent to which one appreciates luck’s role influences the types of policies one supports, including the level and structure of taxation.

Additionally, there are a range of socio-psychological tendencies that undermine our ability to manage money well. At the RSA, we call these ‘behavioural hurdles’ to financial capability. For example, the tendency to be overconfident and optimistic can make it hard to plan effectively for what is really in store. This might range from having optimism that this season’s crop harvest will be sufficient to overextending on a property mortgage because you’re just sure that you’ll get that promotion next quarter. Optimism and overconfidence on their own, like the other behavioural hurdles, can be positive and adaptive qualities; after all, we need a degree of optimism to go out and meet new people, start new jobs and step outside our comfort zones. However, with respect to financial planning and money management, they can also often be detrimental.

The consequence of scarce resources

Financial scarcity can have a dramatic effect on our power to create. Behavioural scientists Sendhil Mullainathan and Eldar Shafir examine this experience in their 2013 book Scarcity. Not having ‘enough’ — whether this is money, time or something else — leaves people feeling mentally depleted because making trade-offs is cognitively demanding. Numerous studies in the lab and in the field show that experiencing scarcity reduces ‘cognitive bandwidth’. This means that we tend to tunnel our attention on the most urgent issue at hand and often fall back on choosing the simplest — but not necessarily the best — option. In some cases, the effect has been a reduction of 13 IQ points, an effect equivalent to denying oneself an entire night of sleep. In other words, struggling to juggle expenses within a constrained budget (or struggling to fit too many commitments into a 24-hour day) can actually impair our decision-making capability.

This can lead to a vicious cycle: difficult financial conditions foster sub-optimal decision-making, which in turn worsens the conditions. This means that once one experiences financial duress, it can be especially difficult to pull out of it.

Alongside the decision-making effects of scarce resources, there may also be effects on how readily we engage in play. What does playing have to do with the power to create? According to primatologist Isabel Behncke, play can help us adapt to a fast-changing world through its generation of novelty, creativity, trust and social bonding. Speaking at Ogilvy’s Nudgestock conference (a gathering of behavioural science experts) earlier this year, Behncke explained that playing “is a behavioural expression of creativity” and happens in animals with complex social structures and complex cognition, such as humans, dogs, dolphins and crows.

All behaviour has trade-offs, and play is no exception: it is fun, but it is also costly and risky. Play is costly because it uses up precious time and energy that could be used on other pursuits, such as working, acquiring food, tending to the home (or seeking shelter) or protecting kin. The function of playing, beyond hedonic enjoyment, has typically been seen as supporting juvenile development. That humans play as adults is interesting given its costs, but even in adulthood there are benefits: through the act of playing we often innovate, test boundaries and foster trust with others. To me, these qualities epitomise the power to create.

“through the act of playing we often innovate”

More than being just fun and games, playing is a valuable component of adult development. In her research with bonobo apes, Behncke finds that given its costliness, play happens more in the plentiful months when there is more fruit available. It seems reasonable to propose that this can be generalised to humans as well — we are better able to playfully express our creativity when we aren’t struggling to scrape together sufficient money, time or headspace to get by.

It can be argued that constraints actually promote creativity, in that they provide the boundaries within which one must innovate. However, the image of the starving artist is probably more a reflection on how society values art than a comment on the constraints of hunger spurring art. In other words, the artist is starving precisely because she is an artist, but not all who are starving produce art. And when the RSA talks about the power to create, we aim for this to be a persistent way of being rather than an isolated event. Therefore, if we are to really promote the power to create, we need to create the conditions within which people are not plagued by scarcity, and have at least a minimum level of security so that they can make decisions well and have a playful frame of mind to engage in self-directed creative activities.

Supporting financial wellness

So what is the best way to support financial wellness, freeing up enough financial and cognitive resources to have the power to create? To address financial capability, we could improve the provision of financial education and (re)design financial products and services with our behavioural hurdles in mind.

More specifically, we need new forms of financial education that go beyond simply delivering technical information. The next generation of financial education should consider the role of behavioural hurdles, personal values and life goals, and focus on how to support objectively and subjectively better decision-making around finances. This might include open discussions around the social-psychological aspects of money management, with techniques or strategies for dealing with particular circumstances. This type of education, supporting the navigation of daily and long-term financial decision-making, could result in better objective financial outcomes, such as fewer instances of going overdrawn, and in subjective measures such as improved feelings of control.

Alongside providing the right type of financial education, there is a need to design financial products and services that work with our best interests in mind given all of our human imperfections. If products are designed for people who will always make careful cost-benefit calculations prior to taking a decision, they are not catering to real people. While many of our socio-psychological tendencies are deeply rooted and hard to change, the design of products is something that can be altered relatively quickly. Therefore, financial service providers should take into consideration the behavioural hurdles to financial capability and products should be designed with a cognitively overloaded person in mind as a typical service user.

While these approaches may help support financial capability, they still leave people susceptible to misfortune through bad luck. To this end, there may also be structural changes that could help alleviate pressure, such as adopting a universal basic income or progressive consumption tax. Universal Basic Income, as outlined in a recent RSA report, is a regular, unconditional payment made to each citizen. Everyone gets something. This may be particularly useful given the changing nature of work and careers, reflecting disruptive technological innovation and the trend for many to live longer. The pairing of uncertainty and longer working lives gives rise to the potential for more instances of changing jobs, and therefore discontinuity of a pay cheque. An open question is at what level should the payment be set, to alleviate stress and financial pressure while ensuring a socially and economically productive society?

“Universal Basic Income may be particularly useful given the changing nature of work and careers”

Another structural change would be to institute a progressive consumption tax, as advocated by Frank. This would help stem high-end spending on luxury goods, changing social norms for the ultra-wealthy and those who are slightly less wealthy but travel in the same social circles. The result is foreseen to be a cascade effect, whereby the stemmed spending and resultant change in norms trickles down. If implemented effectively, Frank suggests that the result would be a reduction in the overall spending on consumption goods, while generating public income, and therefore more opportunity for investment in infrastructure goods and public services.

Piloting for assurance

But how will we know which approach to use? If there are two messages that behavioural scientists love to drum home they are that context matters, and interventions can have surprising, unintended consequences. Would a new financial education curriculum improve the lives of people taking that class? Maybe. Could universal basic income be one way to alleviate some of the pressures on time and headspace without jeopardising financial security? Perhaps. Could a progressive consumption tax bring the collective bar down in terms of unnecessary conspicuous consumption, thereby helping people who feel that they don’t have enough to keep up with their friends and neighbours? Possibly. But it would be unwise to hastily roll out any of these approaches across the board.

Instead, these approaches should be piloted first so that we can learn what works and what doesn’t, for whom, and in which context. This reflects a welcome trend in policymaking in the UK and elsewhere to, in the words of the Behavioural Insights Team, “test, learn and adapt”. Indeed, universal basic income is being trialled in Finland now, and it will be interesting to learn what comes from that.

For any of the proposed approaches, let’s build up the evidence base for what works to help people maintain financial wellness, even in the face of bad luck, so that we can all have the opportunity to play, make good decisions and unleash our own power to create.


Nathalie Spencer is a behavioural scientist at ING. At the time of writing, she was senior researcher at the RSA and leading its Social Brain Behavioural Science work

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