We’re all about helping you become better with your money. Sometimes that’s with simple tips to build into your daily routine, other times through news insights or stories of boom and bust from around the world.
But unless you’re aware of the behavioural biases you have towards money, it’s hard to learn those hard financial lessons, balance the books and build lasting wealth.
So to help get a handle on the behavioural traits that might be holding you back, we dug into the findings of a recent study by the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA), conducted in partnership with the London School of Economics and the Fairbanking Foundation
In the study, researchers looked into the natural human characteristics that hold people back from being better with their money, because it’s not just a lack of information that sends people broke.
In a nutshell, the study confirms that we’re simply not wired to handle money well.
The report, Wired for Imprudence, highlights six behavioural hurdles as being particularly problematic.
Having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.
Overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.
Optimism and overconfidence
Wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.
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Seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.
Automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.
We are heavily influenced by the actions of others; while this can be helpful in certain circumstances, it also contributes to the pressure to keep up with the Joneses through conspicuous consumption.
The authors of the study are quick to point out that these aren’t character flaws, simply natural aspects of human behaviour that hold us all back from managing our money better.
“Behavioural science teaches us that most of what we do simply comes about rather than being thought about,” says Paul Dolan, an author of teh report and Professor of Behavioural Science at the London School of Economics and Political Science.
“Being good with money does not come naturally to some people and the options in an information and opportunity rich world can seem daunting to most of us.”
But it’s not a lost cause.
In highlighting the natural behaviours that harm our budgets, the study can act as a reminder to be conscious of spending habits and curb those that cost you the most.
It also throws up some interesting points about the effectiveness financial education.
The authors go on to recommend that more research is carried out to trial practical, action based financial education, rather than textbook based stuff, and also look at more timely education that builds on basic understandings of money that are reinforced at crucial times when people are about to make important financial decisions.
We’ll certainly be taking their insights on board and bringing you a few more action based articles to help overcome some of the behavioural biases we’re all working against…