Text: Leonore Riitsalu, MTÜ Rahatarkus, expert in financial education
Photo credit: Pixabay
Promoters of financial education have been against the application of behavioural insights and vice versa, behavioural scientist have questioned the effectiveness of financial education. Often these experts have limited understanding of the other side´s paradigm and tend to overly simplify the opposing view. The first argue that nudges can be manipulative and do not empower the consumers. The second say financial education has limited or no effect of behaviour, therefore tends to be rather useless.
Financial education in its narrowest sense, classroom training, is not likely to result in long term behaviour change. Behavioural insights alone, without prudently regulated financial markets and low understanding of the basics of finances, are not likely to increase financial well-being in the society. However, the combination of the two can lead to behaviour change. Financial education in its wider sense, learning in a great variety of ways (e.g. by using mobile applications, attending online courses, reading blogs or simply searching online), provides plenty of space for the application of behavioural insights.
Financial education is defined by the OECD (2005) as the process by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.
This approach includes not only financial training but also advice, information provided on- and off-line, and more importantly, it emphasises the role and responsibility of the individual. If individuals are motivated to search for information, use online tools and ask for advice, they are more likely to make sound financial choices. Participating in a mandatory financial education course using the traditional approach is less likely to lead to any behavioural improvements.
There is no commonly agreed definition of behavioural insights, it is used as a broader term than behavioural economics or economic psychology. The OECD (2017) summarizes:
Behavioural insights aim at improving the welfare of citizens and consumers through policies and regulations that are formed based on empirically-tested results, derived using sound experimental methods. Behavioural insights is one discipline in a family of three, the others being behavioural sciences and behavioural economics, which mix traditional economic strategies with insights from psychology, cognitive science and other social sciences to discover the many “irrational” factors that influence decision making.
In recent years, behavioural insights have gained popularity in both research and policy-making. There are behavioural insights teams advising several governments and both of the founding fathers of behavioural economics, Daniel Kahneman and Richard Thaler have been nominated the Nobel Prize. The best known examples of applying behavioural insights for improving financial behaviours are the use of default options for increasing retirements savings and the Save More Tomorrow scheme.
National strategies for financial education are starting to use behavioural insights in its design (e.g. Australia, United Kingdom, Saudi Arabia), so far these tended to focus on provision of knowledge and raising awareness, as these were assumed to lead to behaviour change. Nowadays several strategy documents highlight the applicability of behavioural insights for increasing financial well-being. Therefore, these two sides are slowly but certainly starting to move closer together in order to lead to the increase of financial well-being in the society. Financial education programmes are testing behaviourally informed interventions for improved behavioural programmes.