Insights

How behavioural science can level up your FinWell strategy

29 Feb 2024

1 min read

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Behavioural science can play a significant role in building effective financial wellbeing strategies by understanding and influencing the behavioural factors that impact financial decisions.

Imagine that you're wherever you would normally have lunch. How would you go about deciding what to have? 

 

Would it look something like this?

 

  • Gather all available information about all available lunch options

 

  • Calculate the benefits and costs associated with each option

  • Choose the option that maximises your benefits and minimises costs

 

Or, would you go about it in one of these ways?

 

  • Choose exactly the same as what you had yesterday

  • Choose something that seems ‘good enough’

  • Choose what your friend or partner suggests

 

Let’s face it, the type of person in the first list doesn’t really exist - our decisions are almost always swayed by factors or influences from the outside world. This is the core of what behavioural science is used for  - it is the design of systems and processes that speak to the reality of how humans make decisions.

Key takeaways

Setting defaults

as the positive action drives better results, eg. opt-out savings programmes

Social norms

can promote positive habits, as they create a sense of community and conformity, eg. discussing money worries

Immediate reward

can be more powerful than delayed gratification for encouraging positive habits, eg. prize draw for hitting savings goal
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Behavioural science - real-world applications

 

One interesting example of behavioural economics at work in society, was shared by Owain Service, CEO of CogCo and former Deputy Director of the Prime Minister's Strategy Unit, at our most recent Financial Wellbeing Forum. In 2017, Service and his team looked at messages sent by HMRC in regards to tax payments - specifically towards those who had outstanding payments. Historically, one standard letter, written in dense and complicated ‘legalese’, was sent to individuals who needed to pay taxes - which had roughly a 33% success rate. With the help of the behavioural insights team, four additional letters were tested among trial groups:


“Nine out of ten people pay their tax on time. You are in the minority that does not pay their tax on time.” 

 

“Nine out of ten people in your local area pay their tax on time. You are in the minority...” 

 

“Nine out of ten people with a debt like yours pay their tax on time. You are in the minority...”

 

“Nine out of ten people with a debt like yours, in your area, pay their tax on time. You are in the minority...”

 

The last letter was most effective - and overall the experiment increased the percentage of recipients who go on to pay their outstanding taxes by 6% (from 33% to 39%) - in context, in the 3 weeks in which this experiment ran, it drove roughly a £3 million increase in tax payments.

 

The success of these letters comes from introducing a social dimension to the way people pay their taxes, letter one creates a comparison with other tax-payers, letter two introduces the ‘neighbour effect’, letter three creates a sense of community, and so on. Much like the first example of how you choose your lunch each day - by introducing the actions of other people into the decision-making process, individuals are influenced into making certain decisions, whether they’re acutely aware of it or not. 

 

How does behavioural science impact how we manage our money?

 

‘Mental accounting’ was a term coined by Richard Thaler (Nobel-prize winning economist), to broadly explain the way in which people value money in their minds, based on subjective criteria; for example, money that is gifted or unexpected should not be treated more frivolously to money that has been earned at work - according to Thaler’s work - every ‘dollar’ should be valued equally. To put a complicated concept in simpler terms - let’s look at a few examples:

 

  • Take an individual who is saving cash in a jar for a dream holiday, but who is also carrying credit card debt; they don’t use the holiday money to pay down their debt, because they have mentally deposited it elsewhere in their budget, and have attached importance to it. This is an example of mental-accounting bias, where despite having the option of using this money to pay down their debt, the individual does not, as mentally it is not available for them to use.

 

  • Similarly, imagine someone unexpectedly receives a tax refund. Instead of using it responsibly, such as paying off debts or saving, they might decide to spend it on non-essential items like a luxury purchase. This behaviour occurs because they mentally label the windfall as ‘extra’ or ‘free’ money, separating it from their regular budget and feeling justified in using it frivolously, even though financially responsible choices might be more beneficial. This is another example of mental-accounting bias. 

 

Almost everyone will have experienced this concept in some form or another when it comes to managing finances, and it calls back to the idea that no human makes entirely rational decisions, as we are constantly influenced by external factors, be that our peers, our emotions, and so on. This is why it is essential to grasp an understanding of how behavioural science helps us understand how humans make decisions, and optimise systems and mechanisms to mimic those processes more closely.

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Owain Service was previously Deputy Director of the 'nudge' unit - working across a number of central government campaigns in the UK

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Behavioural science is commonly applied across adverts, initiatives and campaigns you see every day

How do behavioural science principles translate into your financial wellbeing strategy?

 

Behavioural science can play a significant role in building effective financial wellbeing strategies by understanding and influencing the behavioural factors that impact financial decisions. There are several ways in which behavioural science can be leveraged:

 

Nudge for positive behaviour:

 

  • Defaults: Set default options that encourage positive financial behaviours. For instance, running an opt-out savings scheme, where the default status for employees to start saving can increase participation rates and help colleagues build a financial buffer.

 

Focus on framing:

 

  • Positive Framing: Money topics can often be associated with feelings of stress and negativity. By framing financial information and messages positively you create a healthier and happier environment for colleagues to discuss money. Examples of this: using engaging formats, interesting awareness days, or small competitions to convey information.
  • Social Norms: Highlight social norms that promote positive financial habits. Communicate how many colleagues are participating in beneficial financial programs to create a sense of community and conformity. 

 

Prioritise education:

 

  • Simplified Information: Present financial information in a clear and simple manner. Complex information can be overwhelming, and simplifying it can lead to better understanding and decision-making. Running comms through a readability software can ensure that the language is appropriately written for your audience. 

 

Incentivise and reward:

 

  • Immediate Rewards: Consider providing immediate rewards for positive financial behaviours. Immediate gratification can be more compelling than delayed rewards, encouraging individuals to make better financial decisions. For instance, run a savings challenge, and enter those who complete it into a prize draw; when everyone has built a positive financial habit - everyone wins. 

 

Invest in financial tools and technology:

 

  • Financial wellbeing tech: Apps have become one of the most universal communication channels and development tools. Investing in access to a financial wellbeing platform for teams can help implement positive financial habits - through regular nudges, automated saving, and budgeting reminders.

 

Build consistency: 

 

  • Peer Communities: Encourage peer-to-peer sharing on financial topics, whether that’s sharing concerns and challenges or celebrating milestones. Good ways to do this: train internal money champions, gamify and incentivise positive financial habits, utilise awareness days (eg. Time to Talk Day, Talk Money Week, Financial Wellbeing Week). 
  • Goal Tracking: Implement tools that allow individuals to track progress towards their financial goals. Monitoring progress can boost motivation and encourage sustained effort.

 


 

By integrating insights from behavioural science into financial wellbeing strategies, employers and financial institutions can create systems, implement benefits and prepare interventions that better align with human behaviour and decision-making processes - giving employees simpler and more manageable opportunities to adopt and sustain positive financial habits and build long-term financial health. 

Owain Service shared his insights at the 2023 Financial Wellbeing Forum. He presented the session: 'How behavioural science can level up your FinWell strategy'.

Register your interest for 2024 here.
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