Behavioural Economics Field Guide for Financial Services

by | 13 Jan 2021 | Content & Experience

Cup of coffee with laptop

We think every marketer in the industry should read the Behavioural Economics Field Guide for Financial Services developed by the Center for Advanced Hindsight to help financial service providers understand how people think about money.

Should you buy that cup of coffee?

People make an enormous number of monetary decisions every single day. We decide whether we should buy coffee, what kind of coffee to get, if we should use a credit or debit card to pay, and many other things. With the amount of decisions we make about money each day, we might start to think we’re good at making them.

However, the reality is that financial decisions are incredibly complex. Consider, for example, the simple case of buying a cup of coffee for £3.50. To carry out this decision properly, we need to quantify not only the pleasure that we will get from the cup of coffee but also the opportunity cost — what we will give up for the pleasure of the coffee. Only if the expected pleasure of the coffee is larger than the opportunity cost should we spend the money.

So, how do we make (seemingly simple) financial decisions?

The results from multiple experiments show that people rely on rules of thumb — heuristics — to help us solve these complex problems. These heuristics can get us into trouble. For example, people generally don’t consider the short-term good of the purchase relative to the long-term good of saving the money, and instead they simply repeat their past behaviour. Another shortcut people make is to copy their friends’ and neighbours’ behaviour.

The trouble these heuristics can cause is amplified when the decisions are about loans, retirement savings, and mortgages.

The Center for Advanced Hindsight kindly agreed to share their Behavioural Economics Field Guide for Financial Services from their archive, which focuses on some main heuristics and points to the myriad psychological booby traps of financial decision-making.

Download the PDF Document

Photo by rupixen.com on Unsplash

 

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