“Have You Been Worrying More Lately?”
With recent research showing that one in five (21%) UK adults are struggling with debt and money worries, and many saying that their mental health has deteriorated as a result¹, financial stress is a serious threat to both employees and employers. But what can employers do about it?
Insights from behavioural psychology have demonstrated that the way our brains are wired can make us prone to debt. For example, our tendency to ‘discount the future’ and value gains in the present over gains in the future can lead us to spend more than we can afford.
By employing behavioural psychology techniques, and breaking down a large problem such as debt, into small, achievable goals, employers can make a big difference to the financial health of their people.
What Is Behavioural Psychology, and How Can It Help Reduce Debt?
Behavioural psychology analyses how the way we think or feel about something can affect the way we act or behave. Whilst that might seem straightforward, what may be less immediately obvious, is that there are a number of ideas behind some of the principles of behavioural psychology that can really help improve people’s Financial Wellbeing.
Three of the better-known ones are ‘situational bias’, ‘rewarding behaviour’, and ‘confidence bias’. Here’s how they work:
1) Situational Bias
This is about how we tend to be naturally more receptive to something when we can see the relevance of it to our own current situation.
By using employer held data (for example pay-rise, birthday, moving home, change in relationship status) as a foundation, situational-bias means employees more likely to notice and take action. Tailored and personalised reminders (or ‘nudges’) can be particularly effective as a means of engaging people both when and how they need it, to help them reduce their levels of debt. This, in turn, can tie in with the idea of…
2) Rewarding Behaviour
Receiving positive reinforcement when we do something good can help inspire us to take further action to improve our situation. This doesn’t even have to be anything particularly complicated, it could just be something that helps us reliably and comprehensibly see what to do next.
A good example is a study by John Gathergood², from the University of Nottingham, which found that people didn’t behave rationally when faced with credit card debts. Whilst traditional economic theory predicts that individuals follow simple price-based rules, such as repaying the most expensive debt first, in reality consumers tend to focus on balances – which are given prominence on credit card statements – rather than interest rates, which aren’t.
His research found that amongst people with multiple credit card balances, those who focused on just one card paid off more debt than those who spread their repayments equally between cards. The behavioural psychology demonstrated that it wasn’t the size of the repayment, or how small the balance on a card after a payment that had the biggest impact on people’s perception of progress, rather it was the proportion of the balance they succeeded in paying off.
Concentrating on the card with the smallest balance could have a powerful rewarding effect, motivating them to continue reducing their debt.
3) Confidence Bias
This provides us with context, so we can compare our situation to that of people like us, and feel confident enough to try to improve on that (by having less debt, for example). Nudge provides “People Like You” benchmarks (average loans, debt repayments), to give employees the context to help engage them with the range of tools and information in our Borrowing Hub. Once engaged they can understand the true cost of borrowing, and how to prioritise their debt, as well as the basics of budgeting.
Don’t Underestimate the Power of Personalisation
Whilst these three principles are powerful when applied, behavioural psychology should also be applied more broadly. In practical terms, this can be as subtle or as simple as small changes in the way we communicate, or just providing a more personalised experience. It’s a question of finding the right ways to help engage people to help them reduce their debt.
A great example of the power of simply tweaking communication was demonstrated by the Money Advice Service. They found that small tweaks in the way their debt advisers communicated could have a big impact on what people went on to do. By for example avoiding using the word “debt”, and taking steps to personalise the experience, such as adding handwritten notes to letters and making sure people knew the name of the adviser they would be seeing, made a big difference to how people engaged with the debt service.
Show Me the Money…
With more than 40 providers in the UK alone now describing themselves as delivering ‘Financial Wellbeing’ – and particularly when you’re trying to help your people with things like reducing debt – it’s vital to understand the different options available to you as an employer, as well as the drivers and implications of each.
Whilst there are a myriad of products available including hardship loans, payroll advances and counselling, we believe the foundation of any Financial Wellness strategy must be a solid grounding of Financial Education. Not only will this focus on prevention rather than cure, it can provide employees with the context, clarity and confidence to better manage their money every day.
¹ Opinium conducted quantitative research on behalf of the Money Advice Service; among a sample of 2,006 nationally representative UK adults aged 18+ during October 2017.
² How Do Individuals Repay Their Debt? The Balance-Matching Heuristic – John Gathergood, Neale Mahoney, Neil Stewart, Jörg Weber published September 14, 2017 http://cepr.org/sites/default/files/Gathergood%2C%20John%20paper.pdf