Financial capability and saving behaviour Rio de Janeiro December 4th 2014 Ellen K. Nyhus Professor, School of Business and Law University of Agder, Kristiansand, Norway President International Association for Research in Economic Psychology (IAREP)
Why is it so difficult to save? Even squirrels can do it!
Effects of deregulation of the financial markets • Increasingly complex requiring consumers to be well-informed and able to handle vast amounts of information. • Information overload makes it difficult for consumers to make optimal choices when choosing a financial product. • Continuous financial service innovations make it more difficult to avoid unplanned and unwanted spending.
5 Financial capability Staying informed 4 Choosing products 3 Planning ahead 2 Managing money 1 Making ends meet Source: Atkinson, A., McKay, S., Kempson, E., & Collard, S. (2006). Levels of Financial Capability in the UK: Results of a baseline survey . Consumer Research 47. London: Financial Services Authority. http://www.fsa.gov.uk/pubs/consumer-research/crpr47.pdf
Making ends meet and managing money • Majority of consumers manage to make ends meet, but likely that many would benefit from getting better at it • Most finance courses are about budgeting and day-to-day money management Effects of such courses are not clear. Too little focus on planning for the future and everyday strategies for resisting temptations?
Field experiment: Can young consumers be nudged to pay their bills in time? • Phone company: OneCall. A mobile company popular among young adults. • Reminders to pay sent to customers aged 18-30 years 3 days before the due date for paying the invoice. • 1 pure reminder • 3 reminders with «psychological messages» • 500 persons in each group – randomly chosen from all customers in the relevant age group. • Data collection: February 2013 Bjelland, J.L & Stene, E. (2013) http://brage.bibsys.no/xmlui/bitstream/handle/11250/135891/Masteroppgave%20Jorunn% 20Lie%20Bjelland%20og%20Erlend%20Stene.pdf?sequence=1
Changes in default rates after reminding to pay Intervension Jan Feb March Sig- diff from c- 2013 2013 2013 group Feb % % % Pure reminder 3,6 7,2 P<0.01 Anchoring reminder 5,6 13,0 P<.01 Loss aversion reminder 7,0 10,2 P<.05 Social norm reminder 12,8 14,2 ns Control group 9,5 11,0 12,60 N= 500 for each group Lack of money is not necessarily the cause of the high default rates!
Planning ahead Large variation found in time horizons and consideration of future consequences Time horizon related to saving, borrowing and degree of fullfilment of plans to save Future orientation and self-control shaped in childhood and adolescence Insight from neuro-science shows that here-and-now decisions involve other parts of the brain than decisions involving only the future.
The Norwegian «Duty to disuade» Launched in 2000 Through Section 47 of the Financial Contracts Act financial institutions/lenders has a duty to dissuade people from borrowing, if the lender, prior to making a loan agreement with a consumer or disbursing the loan to a consumer, has reason to suppose that the borrower’s financial capacity or other factors connected with the borrower dictate that he should give serious consideration to refraining from taking out the loan. Hveem & Nyhus (2013) http://www.idunn.no/pof/2013/04/fraraadingsplikten_til_bankens_eller_forbrukerens_beste
Consumers’ reaction to disuation: Nearly none! 26 in-depth interviews with financial advisors conducted in 2013. All advisors had long experience with advising consumers Few had experienced that the warning had any effect, and only once or twice. Possible explanation for the small effect: The warning is given too late in the decision process.
Choosing products and staying informed • International studies show large variation in consumers ’ understanding of financial concepts. • Lowest level of knowledge found among young, old and women. • Difficult to choose the best product when not understanding key concepts. • Difficult to understand consequences of financial news for own financial situation.
FINANSPORTALEN.NO Launched in 2008 Presents information about prices and terms for some 520 different mortgages, 1200 savings products from banks and 470 price lists for daily banking services and credit cards. Displays prices and other relevant information regarding a large number of securities funds and general insurance products within travel, car, home contents and private house insurance. Makes it easy to switch supplier Cost: More than NOK 12 million per year + costs involved for companies
Do people use the portal? Which of the following statements best describes how you last chose a financial product? N= 2122 -I considered several products from different companies 26,3% -I considered the various products from the same company 8,8% - I didn’t consider any other products 48,1% -I looked around, but didn’t find any other products to consider 2,2% - Didn’t know/no answer 13% Data collected for the project Financial knowledge in Norway by Ellen Nyhus & Christian Poppe
Which source of information do you feel most influenced your decision about which financial product to take out? (n= 2122) More than one answer possible: - General information in mail, newspapers, TV etc 10,5% - Information from bank/financial institution 39,6% - Finansportalen.no 1,4% - Information on the Internet(excluding Finansportalen) 11,9% - Financial newspapers/magazines/columns 4,6% - Financial advisor 11,6% - Advice from friends/relatives not working in a bank/fin. sector 12,4% - Advice from friends/relatives who do work in a bank/fin. sector 4,6% - Advice from employer 3,2% - Other sources 15,6% - Don’t know 10,7%
Conclusions • Consumers are vulnerable in the financial markets without proper training. • Training should include all aspects of financial capability, not just budgeting • Even with training: Some products may still be too complicated to understand • Consumer credit should be monitored and regulated to limit payment problems. • Independent advisors should be available to consumers. • Interventions must be tested before full-scale implementation
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