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Lisa Winnard: Behavioural economics

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As an HR director I am often heard saying, “It’s all about the behaviour.” But when working with people it is not always straightforward and on occasions human behaviour leaves us questioning why people behave the way they do. This is true for many firms in understanding their own people and customers.

I have been interested to watch how behavioural economics seems to be everywhere nowadays, with speeches, articles, research papers and training courses on the subject.

In a culture today whereby people live beyond their means, spend on high interest rate credit cards, and do not save enough, behavioural economics tries to offer the “why”.

Research has become more prevalent in the last decade, mostly led by psychologists in America. They started by identifying anomalies, strange facts and odd observations wisdom could not explain through rational human decision-making. Essentially behavioural economics, which is mainly experiment led, uses insights from psychology to explain why people behave the way they do.  Most human decision-making uses thought processes that are intuitive and automatic rather than deliberate and controlled.

The early work on this was in finance and provided insight that people act irrationally, in that they overly discount the future. We do worse in life because we spend too much for what we want now at the expense of things we want for the future. The UK is learning from America and Australia and following suit in using behavioural economic theories to build policy.

We have heard lots from the FCA about how the regulator is using this intelligence to create guidance to analyse business models and firms’ behaviours, and to help shape communications with consumers.  In a recent speech, FCA chief executive Martin Wheatley said: “A key issue for the FCA is that behavioural economics is quickly becoming a game changer. Not just for firms, not just for consumers, but potentially for the shape of regulation for many years to come.”

So why is financial services and its success so linked to consumer behaviour? Well, with a complexity of available products, many of which involve trade-offs between the present and future, we need to understand decisions require assessing risk and uncertainty. Put this with the fact that decisions can be emotionally led and on occasions little can be learnt from past mistakes. It is easy to see that clear consumer guidance is key.

In terms of financial services, psychological behaviours can be improved by effective financial education. But a 2006 FSA baseline survey showed financial capability scores only improve with age and the level of general education.  Key here is attitudes rather than teachable knowledge, thus we see people signing up to short-term high interest rates and an unwillingness to engage in difficult and often painful activities such as personal financial planning. 

Lisa Winnard is HR director at Sesame Bankhall Group

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