A lot of effort is put into helping people get to grips with their finances, but it doesn’t seem to be working. Are we using the wrong approach?
Professor Mark Fenton-O'Creevy, who helped design the test, explains what he is hoping to find out.
Governments, companies and educators put a lot of work into providing people with the knowledge to help them with their financial affairs. For example, they try and make sure that people understand terms such as APR, or that they understand the risks involved in different kinds of investments.
Unfortunately, for the most part these kinds of knowledge-based strategies have had limited success in improving how capable people are at managing their money. Do we need a different approach to help people improve their relationship with money?
A different approach?
When people get into financial difficulties it's often not because they lack financial knowledge.
Of course it is important to provide people with access to the information they need to make good decisions. However, when people get into financial difficulties it's often not because they lack of financial knowledge. So what's really going on?
Firstly, unexpected life events often play a crucial part in emerging problems. Secondly, our attitudes, emotional reactions and habitual coping strategies are likely to play an important role in determining how well we deal with what life throws at us. Let's look at just one example. If someone is depressed about debt, and they cope by going shopping on credit, do they so out of ignorance of the likely consequences? Or is it more likely that he or she is coping by avoiding thinking about the consequences?
It may be that supporting people in developing effective coping strategies, and managing the emotional side of dealing with money may be more productive than a purely knowledge-based approach.
There is some small scale evidence that the way people manage their emotions has an important effect on the quality of their financial decisions. There is even some suggestion that this is just as true for finance professionals such as traders in investment banks. But we need to do a large-scale survey to take a much closer look at these issues.
In the Big Money Test, among many other things we look at five dimensions of ‘financial capability’: making ends meet; keeping track of your finances; planning ahead; choosing money products; and staying informed about the ‘bigger picture’, such as interest rates and house price fluctuations.
We also ask questions which tell us a great deal about how people manage their emotions and how they tend to cope with adverse events. We have two important questions in mind. First, are effective emotion management and effective coping strategies linked to improved financial capability? Second, how important are emotion regulation and coping in relation to other factors such as level of education, access to support and advice, level of income and social background?
Although there is some existing evidence on these matters it is by no means conclusive and there is a real absence of large-scale research evidence. We hope your involvement in the Big Money Test will give us the opportunity to provide more definitive answers.
Mark Fenton-O’Creevy is Professor of Organisational Behaviour and Director of Programmes and Curriculum at the Open University Business School. He is currently involved in a cross-European research programme to investigate the relationship between emotions and financial decision-making.
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