1. Context
2. The study
3. Key findings
4. Points to consider

Context

This study examines the ways in which Australian financial consumers make their financial decisions. It draws on the emerging field of behavioural economics to understand why consumers do not necessarily behave as rationally as orthodox economic theory assumes.

While orthodox economics makes assumptions about how consumers should behave, behavioural economics provides a different perspective and seeks to focus instead on how consumers do behave in real life.

The study

This study provides insight into the diverse and sometimes inconsistent ways in which Australians make financial decisions, with a special focus on lower income consumers and those that have experienced financial hardship. It is based on the results of an online, nationally representative survey of 1,180 Australian adults conducted in October 2010.

In addition to standard questions about financial behaviours in certain circumstances, a series of eight randomised experiments were conducted to shed light on different aspects of consumer financial behaviour. Each experiment asked participants eight questions exploring their responses to certain financial scenarios. Different groups of participants were given different scenarios.

The study aimed to apply these experimental research techniques to the real-life context of using everyday financial products and services - such as credit cards, borrowing and saving.

Key findings

• A major determinant of financial hardship is the way financial decisions are made by individuals.
• A major source of financial stress is overconfidence, which can prevent people seeking help.
• A number of steps can be taken to reduce the potential for financial difficulties, including budgeting, shopping around, paying off debts before adding to savings, not being influenced by the framing/context of options, and seeking help in the case of difficulties.

• This may lead to overconfidence, which can have a significant impact on financial decisions.
• Only 9 per cent consider themselves below average in general on financial matters but one third consider themselves below average on matters relating to retirement planning.
• Low income consumers and those who have experienced financial difficulties are more likely to consider themselves below average, but overall more felt they are above average than below.

• People often believe they shop around more than they do.
• People use their own ‘mental accounts’ to create a sense of control but this can mislead them – for example by not consolidating savings and credit balances to minimise interest charges.
• People respond to similar situations in different ways depending on context; frame of reference may be critically important in generating the ‘correct’ decisions.

• The way in which possible loan amounts are presented to consumers can influence the decisions they make.
• The same is true regarding savings and investments: the way in which possible actions are framed can affect the reactions that consumers make as a consequence, for example in response to a drop-in investment value.
• This extends to the way that people treat loans to friends - and the ways in which possible actions are suggested to them regarding charging interest or treating non-repayments.
• All information presented to consumers may be interpreted as a recommendation or suggestion - it may therefore be important to provide people not just with good information, but also the right kind of contextual background.

• Those who have experienced difficulties are twice as likely than others to regard themselves as below average in terms of financial knowledge.
• They are more likely than average to try to resolve their issues themselves.
• They are highly unlikely to seek help from counsellors or charities.

Points to consider

• • The sample was drawn from a reputable panel provider, but it is worth noting that online surveys sometimes produce results that are not replicated exactly by other (interviewer assisted) surveys.
  • The study makes use of innovative but unproven techniques to test behaviours under different circumstances. The approach was intended to replicate real life, but to the respondent there might still be an element of artificiality and therefore their responses may be different to those they would make in real life.
• • Notwithstanding the methodological reservations, the study does shed light on how financial decisions might be made that might be different from orthodox economic theories, and this is an important factor for policy makers and educators to consider.
• • This is a relatively small-scale survey and more work would probably be required to replicate and validate some of its conclusions.

Full report

Evidence versus emotion - full report