In the finance industry, understanding consumer behavior is essential to providing the best products and services possible. When it comes to our finances, we want to think that we primarily make decisions based on logic. However, a valuable consumer insight reveals that this isn't always the case. In fact, our emotions often play a much more significant role in how we save, spend, and invest our money. Whether we're saving for the future or spending on splurging on something fun, emotions affect our decision-making every step of the way.
So, what exactly do consumers feel when it comes to money? That's where behavioral economics comes in.
Behavioral Economics Demystifies A Consumer Insight
Money is a very emotional topic for a lot of people. Our emotions guide a lot of our financial decision-making, and our finances can have a heavy toll on our emotional well-being. In our Rebel Trend Report on retirement industry trends, 33% of people said paying off debt is their biggest stressor, and next in line is saving for retirement, according to 31% of participants. Behavioral economics can help shed some light on the emotions driving these consumer trends.
What is behavioral economics?
Behavioral economics is the study of how people actually make decisions, as opposed to how they should make decisions according to economic theory. Behavioral economics involves looking at the cultural, emotional, psychological, cognitive, and social factors that influence our money decisions. This field considers that humans are irrational creatures––we often make decisions based on emotion rather than logic. And when it comes to money, our emotions can be even more influential.
Slow brain versus fast brain in financial decision making
Bad financial decision-making isn't always the result of consumer ignorance or irrationality. Sometimes it's simply the result of how our brains are wired. Experts in behavioral economics have approached how people make financial decisions into two systems: the slow brain and the fast brain.
So, what do we mean by the slow and fast brain?
The slow brain is responsible for logical, deliberate decisions. This part of the brain does the math and weighs the pros and cons of each option. On the other hand, the fast brain is responsible for more intuitive, emotional decisions. This part of the brain relies on gut instinct and impulse.
Regarding financial decision-making, we'd like to think that the slow brain is often in charge. This makes sense––after all, finances are often complex and require careful consideration. However, there are many situations where the fast brain takes over.
What compels our fast brain to take the driver's seat?
Our pesky emotions and desire for instant gratification often get in the way of logical decision-making. The result? Impulsive purchases and other poor financial decisions.
But, it's not just our brains we have to worry about. Our personality types also play a part in how consumers handle money.
What's Your Money Personality Type?
Understanding a person's money personality is the first step to identifying how they make financial decisions. If you're searching for helpful consumer insight, consider what money personality type your target market falls into.
According to a modern study from the Journal of Financial Therapy, there are four common money personality types:
People with a money avoidance personality tend to have negative feelings towards money. Money avoiders are hindered by fear in making financial decisions. They're disinclined to spend money, even for necessary items. For example, a money avoider might put off buying a new car even though their old one is on its last legs. While being cautious can often be prudent, being too careful can lead to financial problems. Money avoiders struggle to stick to a budget because they're constantly worried about overspending.
All praise the mighty dollar! Money worshipers view money as the solution to all problems. They believe having more money will make them happier, and they're always chasing after the next big purchase. But, this pursuit of happiness can lead to some pretty harmful compulsions. Researchers found that money worshippers are often associated with hoarding, gambling, and overspending habits.
People who see money as a status symbol constantly try to outdo their peers. They want the best of the best and are willing to go into debt to get it. People with this personality type see money as a way to boost their social standing and symbolize achievement and worth. Unfortunately, the drive to keep up with the Joneses can often lead to financial problems, as these people are often bad at sticking to a budget.
Money vigilance refers to people who are secretive about their finances. They're often reluctant to talk about money and are very private about their financial matters. Money vigilantes often worry about various financial problems, from consumer scams to overspending debt. While it's essential to be cautious with your finances, being too secretive can often lead to financial difficulties. Money vigilance may prevent people from getting the help they need to manage their finances.
So, what does this consumer insight into our money personality mean?
Simply put, emotions play a major role in financial decision-making. And depending on a person's money personality, their emotions can either help or hinder their financial success.
Behavioral Pitfalls that Lead to Poor Money Management
Despite our best intentions, bad financial decisions happen. Even amongst the most logical people, there are moments where we let our emotions get the best of us. Here are some behavioral pitfalls that can lead to poor money management:
Decision paralysis is when we are so overwhelmed by the choices in front of us that we can't make a decision. For example, a customer might be paralyzed by all the different investment options available that they don't invest in at all. When we're flooded with too many choices, our emotions can take over and prevent us from making a decision.
Tunneling happens when there is too much focus on the immediate future and not enough on the long-term. Tunneling can lead to bad financial decisions because we're more likely to make choices that will have a short-term payoff even if it's not in our best interest.
How often do we think we'll save more money, make more money, or have more willpower than we actually do? This perspective is called the planning fallacy, and it's a common mistake people make when it comes to financial planning. The planning fallacy can lead to under-saving, overspending, and taking on too much debt.
Improve Emotional Behavior Towards Money
Financial behaviors are not a one-time event but a series of decisions made over time. Money management skills can be learned and improved like any other behavior. There are two ways to overcome these engrained behaviors.
The Goal Gradient Theory—The goal gradient theory supports breaking down long-term goals into smaller manageable objectives. For example, if saving for retirement is the goal, a person should break it down into how much should be saved each year.
Mental Accounting—This method categorizes expenses to make spending decisions. Mental accounting can mean putting all "fun money" into a separate account, so it's not used for bills or other necessary expenses.
Both of these methods can help people overcome the behavioral challenges of money management.
Support Customers To Make Better Financial Decisions
By leveraging the consumer insight that emotions drive consumer behavior, financial brands can help people make better choices with their money. Where can you start?
Well, the first step is acknowledging that emotions play a role in financial decision-making. (And, that's not always a bad thing.) Emotions can be a powerful motivator to help us make positive life changes. However, emotions can also lead to bad financial decisions. That's why it's crucial for the finance industry to provide resources and education that can help consumers recognize their emotions and how they can impact their financial choices.
Some ways the finance industry can support consumers include:
Offering financial education covering behavioral economics, money personalities, and mental accounting.
Providing tools and resources can help people track spending, saving, and investing.
Encouraging people to develop a financial plan that considers their short-term and long-term goals.
Offering financial products that are designed to meet the needs of different consumer types.
Providing customer support that is responsive to consumer questions and concerns.
Consumer insight into the emotions that drive consumer behavior can lead you to help people make better financial choices. And, that's good for everyone.
Research and brand strategy are kind of our thing, so if you have any questions or are interested in seeing what our team can do for your brand, we're here to chat.