The problem with economic theory is that it often paints individuals as autonomous decision-makers. In some schools of thought our financial actions are seen as purely self-serving, with wealth maximisation being the overriding driver. It’s assumed that ‘economic man’ does what he does for the money. A focus on material incentives, material rewards and material outcomes is thought of as inevitable.
As the World Bank study highlights, there are ‘other-regarding’ preferences2 at work in all societies. These are concepts such as the innate human desire for social status; our need to identify with one group while potentially rejecting another group; our willingness to cooperate with others who are seen as cooperating; our tendencies in some instances to behave altruistically; and our willingness to engage either in instrumental reciprocity, responding to kindness with kindness for some long-term gain or intrinsic reciprocity, where an individual will be prepared to either reward or punish the behaviour of others even if it is at a cost to oneself or the community.
Understanding where these counter-intuitive drivers of decision-making come from demands that we understand how our broader group behaves and cooperates, and identifies which decisions are in the best interest of the group. Financial decision-making by an individual is more heavily influenced by the requirements of the broader group than it is by self-interest.
On the one hand, this influence from the group helps explain phenomena such as the ‘third force’ of human drive, alluded to by Daniel Pink in his book Drive. Pink describes how human beings can also be driven, to greater or lesser degrees, by the intrinsic rewards that come from believing you are enhancing the world around you. This contrasts dramatically with the kind of explicit rewards provided by simply meeting basic needs or achieving certain performance goals.
Conversely, understanding the role of social influence by way of social context and social history also helps explain how entire societies can get stuck in dysfunctional behaviours such as corruption, over-indebtedness and xenophobia.
Through social context we derive social norms, those powerful sets of shared beliefs that dictate how community members should behave to maintain group dynamics, or how and with whom individuals should interact in their social networks. The net outcome has the potential to be profoundly destructive to a population.
Failure to understand the importance of social influences on financial decisionmaking has been the undoing of many financial wellness and financial literacy programmes. As the World Bank study cautions us, policymakers often underestimate how critical this social component is in influencing changes in our financial capability.
But if we can get down to the heart of those social norms, come to grips with the context in which they were formed, and identify how a group’s social network influences both the formation of those norms and individual decision-making, we can begin to identify what types of interactions have the greatest potential for creating the kind of new behaviours required to better serve the long term interests of the group.
Understanding who (what type of person) carries influence and why, means we can determine what kind of group role model could change the ‘mental models’ the group employs while making specific decisions. We can target specific individuals to lead and amplify change.
Let’s try to explore this dynamic more fully.
The power of the people
The tendency of the financial services industry is to ‘tell’ people what would be the preferred behaviours they should follow if they want to improve their financial decisionmaking. Our advisory process is often one where our clients share with us their financial concerns and we, in turn, tell them what they must do.
Consider why this might be problematic. If this advisory framework exists outside of the social context, once the individual returns to that context, it’s just a matter of time until the pre-existing social norms prevail. ‘Tell’ an individual that if they want to sort out their retirement shortfall they shouldn’t buy that new car on credit and they will likely revert back to their original plan or, more drastically, change financial advisers. The issue isn’t lack of fortitude or financial savvy. The issue is that there are greater influences at play than you, the adviser.