BrightRock executive director Suzanne Stevens plots the connection between our emotions and our money decisions.
If you’ve ever indulged in a little retail therapy to remedy the blues, you already know there’s a close relationship between our hearts and our wallets. In the 18th century, the father of modern economics, Adam Smith, wrote about the predictable forces of supply and demand. Since then, economists have been steadfast believers in the inherent rationality of financial markets. Smith once said that to be truly happy, a person needs only good health, a lack of debt and a clear conscience.
Clearly, he had never experienced the sublime, albeit short-lived, ecstasy that can be gained from the credit funded purchase of a designer handbag. Somehow, the guilt is a necessary ingredient of this ill-advised pleasure. It’s only in the last decade or two, and thanks to the emergence of a new science called behavioural economics, that our faith in the rationality of financial markets has been shaken. By combining the disciplines of psychology, neuroscience and economics, behavioural scientists are learning that we’re influenced by a host of subconscious emotions and prejudices. To quote one of the leading academics in the field, Israeli born Professor Dan Ariely, our financial decisions are predictably irrational. To make better financial decisions, then, it’s best to understand what some of these prejudices and irrational responses are. Let’s look at three of them:
Anchoring: When processing financial information, we tend to connect ideas to existing ideas – or anchors – that already filed away somewhere in our brain. The problem is that these mental anchors are often completely arbitrary. In life insurance, R1 million of life cover seems to be one of these anchors – you’ll see and hear this sum used in lots of adverts and examples. But when we look at different people’s financial risks and requirements, this arbitrary figure of R1 million seldom has any bearing on how much cover they actually need.
Framing: Our perception of financial matters is based on the context and how it’s framed. When life insurance is framed as a windfall, people tend to feel positive towards it – even though this may lead to unmet expectations at the point of claim. If it’s framed with fear, people tend not to want to think or talk about it at all. A more rational frame, which means looking at how life insurance relates to your everyday financial obligations, can remove both the fear and the hype, ensuring that you make an informed decision about your financial protection.
Status quo bias: When it comes to money decisions, people tend to get very snug in their comfort zones – failing to act even in the face of pretty serious long-term consequences. Let’s look at life insurance again. No matter how aware you are that you need to have cover, you may delay getting it. It takes a pretty strong incentive to overcome this bias in favour of the status quo – a need supplied, in BrightRock’s case, by the prospect of a 30% savings on your life insurance premiums from the word go.