Let’s continue down the rabbit hole, shall we?
Last week I took a deep dive into the driving forces behind our everyday decisions – and one of the best books ever written on the topic, Dan Ariely’s Predictably Irrational: The Hidden Forces That Shape Our Decisions. I was trying to find the answer to the ever-pressing question: why is it so hard for people to spend less and save more – and how can we make it easier?
Circling back to the experiment Professor Ariely conducted with his colleague, Professor Wertenbroch, you might remember that the students in the class with the rigid term paper submission deadlines got the best grades. What I haven’t revealed in part one, however, is how the other two groups did. And it might be just as telling.
The class with no deadlines at all, except for a final deadline, came in last, while the class in which students used the scheduling tool to set their own schedule finished second. Meaning that strict rules clearly help curb students’ tendency to procrastinate. However, even more important is the other conclusion Professor Ariely drew from the experiment. That is, if given the chance to set up and pre-commit to deadlines, students perform better.
Most students in the runner-up class were well aware of their proneness to put off writing papers. In fact, the vast majority made sure to properly space out their deadlines and ended up with grades as good as those of the winning class as a result. The ones who didn’t mostly handed in hastily written work, pulling the class average down. In other words, procrastination is something most of us struggle with. Yet, those who admit their weakness are in a much better position to overcome it using available tools and strategies.
But when it comes to personal finances, who should these come from? Governments? Retailers? Financial service providers?
Whoever it is, there certainly are some great ways to get started. In Switzerland, for example, Budgetberatung Schweiz, an umbrella organisation offering budgetary advice, recommends that housing costs should not exceed 25% of residents’ net income. So it’s common practice for agencies to ask candidates to provide wage slips to ensure their rental won’t overburden their budgets. In the UK, HM Revenue and Customs launched a scheme to help low-wage earners make savings, awarding them 50p for every £1 they save over four years in their account in 2018. By early 2020, over 160,000 eligible Brits have joined and deposited a total of £4,075,000 each month.
That said, banks should definitely take the lead in promoting rational spending and saving habits. Artificial intelligence and machine learning make it possible for them to understand consumers and provide support to millions of customers whenever and wherever they need it. Looking at current balances, spending patterns and upcoming payments, they can alert customers of scheduled transactions that might send them into the red or motivate them to stick to the 50/30/20 budgeting rule. Or go as far as showing them how their essential spending can be trimmed and helping them find more budget-friendly grocery stores.
But, as Professor Ariely’s findings suggest, taking smaller steps in the right direction can also result in a learning curve. Let’s say someone sees that they’ve just received their salary and now have €3,000 in their current account. Would they think twice before buying a new pair of shoes for €100? Probably not. But what if they saw they only have €300 in actual fact– after paying all essential bills and necessities? That’s an experiment worth trying for banks and banking customers alike.