The future is hazy
Written by Quietroom
It seems fairly obvious that if you encourage schoolchildren to spend more time working out compound interest and the mean, median and range of retirement ages, then when they grow up they’ll make better financial decisions.
It’s obvious, but it’s probably wrong.
A hundred thousand years of evolution has programmed humans to see the present vividly, tomorrow hazily and next year as a blur. As a result, we make judgements based on our immediate situation, mood and needs. People don’t make rational decisions based on data. They make emotional decisions and then avoid questioning them.
That doesn’t mean we shouldn’t bother with financial education. I’ve worked on financial education projects for Unilever – where employees asked for benefits information that would help them understand, plan and choose. But I’ve also worked on automatic enrolment for Whitbread, where employees specifically told us that they wanted as little information as possible. Too few employers ask people what they want and how they want it.
But giving people the financial facts of life won’t change the way they think and behave.
If automatic enrolment has taught the financial services industry anything, it’s the importance of making ‘good financial behaviour’ the norm – the default position. So rather than trying to educate/frighten people into buying Critical Illness cover, why not make it part of every employee’s contract. You have to give people the right to opt out or they’ll rebel, but few will utilize that right, because we’re all programmed to do what the rest of the herd does – that’s what makes herds feel safe. It’s the reason people buy the bland coffee that Starbucks sell (other bland coffee retailers are available).
78% of people in the UK don’t understand percentages. The other 47% aren’t great at them either. But that’s not the reason people borrow from Wonga. They borrow from Wonga because Wonga makes it easy and because they don’t know about better options. They do it because they need money today, and that need is far more vivid than the interest they’ll have to pay tomorrow.
These moneylenders don’t use education to get people to borrow at extortionate rates, they trade on the way that people actually make decisions. They create a strong brand that people can relate to, and only do one thing – they make it really easy to borrow some cash right now. We could legislate against them (and we need to keep helping people understand them) but why not help credit unions and other established providers learn from them and promote themselves in the same way?
There are other areas too, where we could apply this principle of harnessing people’s behaviour rather than trying to change it.
People are reluctant to save because we’re programmed to dislike losses more than we like gains – especially if the loss is now and the gain is in the future. So don’t ask people to do it. People have good intentions for tomorrow – because tomorrow’s hazy – so ask them to give up some of that income instead. Sign people up to increases in pension contributions that coincide with future pay increases. It’s money they never had, so they don’t miss it. This is the Save More Tomorrow idea, explored in the bestselling Nudge, and implemented with stunning success.
As I’ve said, all this does not mean there’s no place for educating consumers. Quietroom recently did street interviews with people. We asked things like what a pension was, what income drawdown was, what a bond was. These people – bright people – really struggled. But more surprisingly, they felt it was their fault. They felt they should know these things.
How much would most industries give for a consumer base that feels guilty for not knowing more about their products? It’s an opportunity that financial services companies need to grab.
It’s the industry that needs to be educated, more than the consumers do. Educated to help people make better financial decisions, by harnessing how people think and behave in the real world. Here are some pointers:
- Start young – Get children to understand the financial basics and they’ll be able to apply them. Let’s make maths more relevant to real life.
- Be timely – Why just send annual statements? Help employers talk to people when they get promoted, have a child or change their marital status – when financial decisions are relevant.
- Make it interactive – Don’t lecture, and don’t expect people to plough through paperwork. Use technology to help people engage with material, try things out, exchange ideas. And use technology to listen.
- Talk from their perspective – Talk to people about themselves, not about products. And speak their language, or they won’t respond. Going on about bond yields and commutation rates will make people nod as if they understand, but race for the exit the first chance they get.
- Make it easy – Don’t force people to make choices. Design and market products with a clear default option that just works.
- Stop banging on about ‘education’ – It makes things sound difficult and most people didn’t enjoy the work they did at school – it was a chore.