Changing how we think about the problem
How could we go about improving the financial decision-making and financial capability of an individual? There are any number of how-to books that profess various formulas for success. But as David Brooks, the New York Times’s pre-eminent pundit on social and political issues, explains in his book The Social Animal, these formulas are typically derived from “the surface level of life”: what knowledge needs to be acquired and what physical steps need to be taken. Getting to the heart of financial decision-making demands we go one step deeper. As Brooks points out:
“We are living in the middle of a revolution in consciousness. Over the past few years, geneticists, neuroscientists, psychologists, sociologists, economists, anthropologists, and others have made great strides in understanding the building blocks of human flourishing.1”
The critical insight: our conscious, deliberative thinking capacity plays a relatively minor role in the outcome.
Earlier this year, the World Bank published their annual World Development Report with a review of why development projects tend to fail in emerging economies. We saw the paper as providing a superb template for getting to the heart of any change management issues. The study argues along the same lines as David Brooks: to understand what informs financial decisionmaking, we need an approach that goes significantly beyond financial or economic analysis to meaningfully integrate elements of behavioural finance, anthropology, development economics, psychology and even historical context. Specifically we need to understand:
- When it is that our brains are using automatic thinking to make decisions and when they are using deliberative, knowledge-based thinking in making decisions
- The role that social context plays in decision-making
- The critical role of mental models in both dysfunctional and constructive outcomes.
While the intent of their study is to use these insights to better inform how policymakers, development specialists and service providers could create more effective outcomes for communities and societies, we will take each in turn to illustrate how these insights are equally valuable in the world of financial advice and financial empowerment. In addition, we will look at how people’s mindsets about money affect their interaction with it. This examines how our psychological disposition towards money influences decision-making.