Behavioural economics – no, don’t yawn yet
While the rest of us get on with paying the bills and going to work, economists are slugging it out in grand intellectual style. What are they arguing about? Well, little old us, of course.
At the centre of the fisticuffs is a big debate about whether we can be totally logical when it comes to money – weigh up the facts at hand and make coolly rationale decisions – or whether we are bound by our emotions and the merry dance they lead us across our personal financial landscape.
This second view is championed by Professor Richard Thaler of the University of Chicago’s Booth School of Business.
He developed the idea of ‘nudging’ people to make the right financial decisions. This is something that even the last government looked at in some detail, particularly when it came to nudging us to pay tax.
Now Thaler has a new book out which looks at how behavioural economics has developed. This has ruffled the feathers of the number crunchers.
Why is this of interest to Money Fight Club?
We believe that money is a very emotive subject; in fact, we called it ’emotional glue’ in a recent blog on LinkedIn, where we were talking about our employee financial wellbeing training.
When we look at the facts (in our human way), what we see is an ocean of financial information and advice, much of it available online and for free, BUT served to a population that is still being flimflammed, ripped off and bamboozled by apparently respectable institutions.
People are not stupid, but drowning them in information is simply not working.
We firmly believe that if you want people to survive and thrive in this ever more complex financial world you have to address what being human means when it comes to financial decisions; why we feel so empowered about some purchases, then ram our heads in the sand when it comes to other financial decisions. Money Fight Club is all about changing attitudes and then handing out the weaponry.
Taking your finances EAST
For example, the Behavioural Insights Team (which started out as the government’s ‘nudge unit’ but is now an independent think tank) came up with the idea of EAST – if you want to encourage a behaviour, make it Easy, Attractive, Social and Timely.
They point out that most of us have been in situations where we had every intention of doing something, but never quite got around to it. “These might be relatively small things, like tidying your home or switching your energy supplier to get a better deal.
“Sometimes it can be for those really important things in our lives, like starting a pension plan, making a will, or applying to university.” Oh yes.
Making decisions easier
Their argument is that organisations should make it easier for people to make sound decisions. At Money Fight Club, our worry is that it is in the interests of big business and financial institutions to make decisions tricky. They make more profit out of us that way.
So, don’t wait. What would make it Easier, more Attractive, more Social and Timely for you to make a decision today about, say, switching energy supplier? We know that a lot of fixed price energy contracts are coming to an end around now, so it’s a good time to tackle this one.
So try this:
EASY Don’t set yourself the task of finding the very, very, very best energy tariff ever – just promise to cut how much you pay from where it is now. That could be as simple as phoning your current supplier about moving to a fixed rate, or paying by direct debit, or going over to paperless billing
ATTRACTIVE Saving energy is an attractive quality. Revel in being greener in your energy use. Become an energy-saving guru – and feel good about it.
SOCIAL Ask friends about their energy bills and tariffs. Creating a situation where looking for better deals is the social norm among friends and family and helps create the right environment to make you want to act.
TIMELY Bring a distant saving into the present. Imagine if you cut your energy bill by just £2 a month. What does that amount to in a year – in 5 years? Now… what could you do with that saved money?
Okay, money fighters – head EAST!