A behavioural lens on financial literacy
November 30, 2017
By Dilip Soman, Professor of Marketing and Co-Director of Behavioural Economics in Action at Rotman School of Management and Jane Rooney, Canada’s Financial Literacy Leader
As we mark the end of Financial Literacy Month, it is probably uncontroversial to say that there is much work to be done to improve the financial health of Canadians.
In an era of uncertainty and massive changes in the financial services sector ushered in by technology, it is even more important for Canadians to be able to have the knowledge, skills and confidence to make responsible financial decisions. While this might suggest a call to spend more energy, time and resources, we suggest that it is time to focus our efforts on spending smarter and not necessarily spending more.
Four simple principles can help us spend smarter:
- supplementing financial education with behaviour change interventions
- aiming for just-in-time interventions
- recognizing that one size doesn’t fit all because context matters
- relentless and ongoing testing
In the realm of financial literacy, we see our goal as not merely providing education but giving Canadians all the tools to make better financial decisions. We are not only aiming to increase knowledge; we are aiming to empower Canadians and influence positive behaviour change. In other words, we don’t just want to teach people the principles of budgeting or retirement savings; we want them to make a budget or to effectively manage their retirement plans.
In order to better understand how we could help with behaviour change, we lean on the science of behavioural economics made popular by the 2017 Economics Nobel Laureate Richard Thaler. Thaler makes a distinction between econs (robot-like people who are rational, consume information, make responsible choices and are unemotional) and humans (real people who are impulsive, tend to procrastinate, don’t like jargon and are swayed by emotion). Financial well-being is easy for econs – you could teach them financial principles and they will make better decisions. But not so for humans – they will possibly forget, get overwhelmed by jargon or options, and may choose to do it tomorrow. The reality is, leaving aside the fictional Mr. Spock or Commander Data from Star Trek, the world is full of humans with good intentions that may not translate to actions.
How, then, do we think about improving returns from financial literacy efforts?
The same behavioural economics that identifies problems also offers prescriptive solutions. Understanding the psychology of the end user – in particular their inertia for getting things done and their lack of attention in processing complex financial decisions – allows us to not only better design (simpler) products but also communicate in ways that are consistent with people's mental models.
We could also provide Canadians with tools that can help put plans into action. In a recent World Bank study, participants in a financial literacy program that also received coaching or a planning worksheet were more likely to make better decisions than people receiving education alone. Hence, we could focus on the development of simple tools and interventions, like the Financial Consumer Agency of Canada’s financial tools and calculators, to complement literacy programs.
Other research finds a rapid decay in effects of financial literacy on behaviour with time. This calls for just-in-time literacy, which is the basis of ongoing research at the University of Toronto that we call Financial Literacy in a Box.
But perhaps the biggest lesson from behavioural economics is the notion of context dependence; that choices depend on a large number of elements of the context that they are made in. These could include things like the manner in which information is presented, whether decisions are made online or offline, the presence of others, emotions, physical environment and time of day. Given the very large number of variables that are at play, it is critical to test financial literacy interventions before they are scaled up. Testing and evaluating at the end of projects can simply be too late. And given the effects of context, interventions that have worked well in a different jurisdiction, or at a different time may not necessarily continue to be effective. Therefore, ongoing testing is critical to ensure that scarce resources are not wasted.
Given the increasing complexity of the financial landscape, the reduced time and attention we have to make complex decisions, and scarce resources, the research and evidence-based practice in financial literacy has assumed critical importance.
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