Fixing 'normal'

Behavioural Economics examines the choices we make and why we behave like we do with money.

It has been popularised in books, such as Freakonomics, and few of you may realise the subject is also being taken seriously on our native shores with the Government already using it to help guide public policy and services.

Formed in 2010, the Behavioural Insights Team, often called the Nudge Unit, is now an active part of the Government cabinet and applies insights from academic research in behavioural economics to help shape future policy.

Their work focuses on encouraging people to make better choices for themselves and society – everything from getting more people back into work; to more people saving for a pension; and to fewer people failing to not pay their tax on time.

Although it may seem like a load of new-age gobbledygook, leaning on behavioural insights research and deploying simple social psychology techniques is yielding some surprising results for the Government.

For example, automatically enrolling individuals on to pension schemes has increased saving rates for those employed by large firms in the UK from 61 to 83 per cent.

Informing people who failed to pay their tax that most people had already paid has increased payment rates by more than five per cent, and 100,000 more donors were recently encouraged to join the Organ Donor Register prompted by some subtle psychological marketing ploys in their latest ad campaign.

Whether you like it, or loathe it, behavioural insights research is here to stay and being alert to some of the thinking traps that influence the choices we make and how we behave, particularly where our personal finances are concerned, can actually make it possible to change our behaviour for our own financial benefit.

Thankfully, you don’t need a degree in cognitive psychology to be able to put these some of these techniques into every day practice.

For example, recognising when to avoid following the herd instinct is a common principle familiar to us all.

The inclination to follow the crowd and copy others when it comes to making investments can have damaging effects when we dive in without thinking.

You’d be surprised at how many people want to buy shares in a company that everyone raves about, but often the fundamentals of a firm are overlooked.

To avoid paying much more than you should for little return, it’s simply worth taking a step back and looking at a purchase or investment objectively, before reaching for your wallet.

Sometimes it’s more tempting to decide to buy the latest gadget than to make sure you are contributing enough to your pension.

This common tendency is known as hyperbolic discounting, or put simply, where we consider the effects of our decisions less the further in the future they fall.

As we’re hard-wired to prefer instant gratification, or that which is tangibly soon, this behaviour can have a serious impact on vital actions, such as saving and paying into a pension.

Saving, particularly for retirement, when it can seem a long way off, is viewed as being both a problem of cogitation and willpower.

The advice is therefore simple.

Trying to imagine how much worse off you could be if you don’t save sooner could well provide the proverbial kick you need to stop procrastinating and face your future financial security.

Investor arrogance, or in behavioural economics speak, overconfidence, can also be truly damaging to your back-pocket.

People who are overly confident, perhaps because of past investments which have paid off, may be more likely to think they can continue a good run.

While they are just as likely to predict events with the same accuracy as everyone else, they may be more inclined to underestimate risk.

One way round this thinking trap is to take stock, and try and recognise the restrictions we face in making difficult choices.

NICK Williams is an assistant director at Brewin Dolphin and offers advice on a wide range of financial services to private clients, trusts, charities and pension funds.

Past performance is not an indication of future performance. The value of any investment and any income can fall and you may get back less than you invested. No investment is suitable for all people and should you have any doubts you should consult an authorised financial adviser.

The information contained in this article has been taken from public sources and is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin. No director, representative or employee of Brewin Dolphin accepts liability for any direct or consequential loss arising from the use of this document or its contents.