Context

At the time of publication, the Financial Services Authority (FSA) led the National Strategy for Financial Capability, which aimed to improve the financial capability of the UK population. Improvements in the level of financial capability require a long-term change in attitudes, habits and behaviour towards money. Recognising the difficulty of assessing the impact of initiatives to improve financial capability, the FSA commissioned this review of behavioural economics literature to understand the psychological factors that influence people’s financial choices, and to enable incorporating this understanding into effective interventions.

The study

The literature review had four stages:

• A survey of the evidence on the effect of financial education and literacy on financial behaviour.
• Identification of the cognitive biases that were most relevant to financial behaviour
• Consideration of the implications of these biases for policy.
• Discussion of strategies found in the literature that could act against these biases.

Key findings

Key findings include the following:

• Psychological rather than informational differences may explain the variance in financial capability found in a previous baseline survey
• Some of the key cognitive biases that relate to financial decision making are as follows:
• Procrastination, regret and loss aversion, mental accounting, status quo bias and information overload
• Given that poor financial capability is associated with psychological factors, interventions that focus on improving knowledge are likely to have limited success. Evidence shows that financial education is unlikely to have major lasting effects on knowledge and behaviour.
• However, the review found that most literature was focused on explaining the biases rather than describing how to counter the biases and influence choice.

Overall, there is a lack of direct evidence that the National Strategy for Financial Capability will substantially improve long-term financial decision making. Evidence from behavioural economics is that low financial capability is more to do with psychology than with knowledge. The review concludes that the most straightforward approach is to recognise that biases exist and use regulation to offset the effects. The authors also recommend that further research should be conducted on whether cognitive biases can be overcome in the personal finance domain and that any new data collected must include psychological variables.