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The science behind behavioral economics confirms that people make wholly irrational decisions. In the finance world, identifying which emotions come into play when people make the financial choices they do, can help bankers and those in the finance sector to understand why, whether it’s buying a house, withdrawing cash, investing money or saving for retirement.
To shed some light on the subject, we sat down to chat with the man of the moment Jeff Kreisler, a Princeton educated lawyer turned author, speaker, comedian and advocate for behavioral science. He's co-author of Dollars And Sense and Editor-in-Chief of PeopleScience.com.
Behavioral Economics: what does it mean in the context of the financial world?
Behavioral Economics is very important within the context of banking. Nowadays, data science is a very broadly-accepted discipline within finances, but having access to lots of data is simply not enough to influence consumer behavior. Take FitBit as an example - it acquired tons of information about daily activity at its disposal, but it did not motivate people to exercise more, because it did not incorporate the human element. When these two disciplines of data science and behavioral economics come together, the potential is massive.
In banking in particular, people have a very strong emotional reaction to money and finances. Even if they think they are making an entirely rational decision, there are always emotions involved. Therefore banks should be aware of those feelings in order to assist people in making better decisions with their money. We cannot change human nature - that’s impossible, but we can change the environment which nudges human behavior and influences decisions. Often companies design products and hope they will change human nature, but it’s always the other way around. We should create digital banking products based on a deeper understanding of human behavior.
Why should banks be interested in behavioral economics?
Banks have always been a trusted touchpoint for people. When people make an important decision, like buying a home for example, they have many doubts, questions and lots of missing information. Those decisions contain so many invisible emotions and internal biases - doubts, worries, excitement, confusion, fear of loss. Being a trusted partner and understanding how your customers react to these important life decisions is essential for giving good, and helpful advice.
What about the role of Chief Behavioral Officer with the bank? Is it necessary?
The role of Chief Behavioral Officer is key for any growing institution. It is particularly important in banking and investment arenas, because the industry is driven by numbers in its nature. However, there needs to be a person that looks at things from a bigger perspective, beyond mere numbers and data. The Chief Behavioral Officer understands both the business concerns and the science, and is able to draw conclusions from both disciplines. Truth is there are no off-the-rack solutions for applying all the insights, financial data, inputs from multiple sources. The key is to experiment. Try things. Having someone who leads these experiments is going to be crucial - especially in traditional industries like banking.
How do people generally think about money?
We could write a book about it, but here are just a few of the key principles how people think and about money and get it wrong:
Can you give us some examples of institutions using behavioral economics correctly?
I think that companies in Fintech, healthcare and UI/UX take the most advantage of behavioral economics at the moment.
Here are some great examples:
It’s clear that currently the majority of companies embracing behavioral economics tend to be startups, because there is less risk attached to making changes. If big banks and financial institutions were to follow suit, they would have a huge advantage over the competition, using the information they have accrued on millions of customers to do testing and see what works.
I’m convinced that if these big financial institutions realized the potential that behavioral economics would have on creating new products, they would be converted and banking would be a very different thing altogether.
What kind of behavioral data should banks obtain in order to “nudge” consumers to adopt better financial habits?
I think it would be very good to know what mental state people are in when they make financial decisions. How do you feel when you walk into a bank, when you withdraw money, when you move money around or put money into your pension fund? What transactions cause the most stress or effect our mood the most?
Do people really understand the opportunity cost of their financial decisions or are they blagging their way through for fear of people knowing they don’t?
Certainly when designing products, we can draw on all sorts of data and make infinitely more useful banking tools for our customers - it’s not easy by any means, but definitely not impossible!