The mechanisms behind financial behaviour
Seven psychological forces that drive financial behaviour
Documented by Kahneman, Thaler and Shiller. They apply to your clients, your employees and your boardroom. And all of them are designable.
01 - Present Bias
The present is always too attractive
Saving for retirement, building a financial buffer, investing in sustainability: clients know it makes sense. The reward feels too far away. Present bias makes every decision that delays gratification harder than it needs to be.
02 - Loss Aversion
Losses weigh twice as heavy
Kahneman and Tversky showed that a loss feels twice as painful as an equivalent gain feels pleasant. In investment portfolios, this drives panic selling in corrections and holding on to losing positions.
03 - Status Quo Bias
The familiar always beats the better
Clients choose the default option, even when it is suboptimal. The effort of switching feels larger than the benefit. Whoever designs the default is, in effect, designing the behaviour of most clients.
04 - Anchoring
The first number sets the frame
The first price, the first interest rate, the first offer: they anchor perceptions of what is reasonable. In negotiations, in product presentations, in risk assessment.
05 - Herd Behaviour
Social norms as the strongest proof
What others do is the most powerful signal that something is right. In markets, this produces bubbles and crashes. In product design, it can be deployed as social proof.
06 - Overconfidence
Experts underestimate risk the most
The more expertise someone has, the stronger their belief that they can assess risk. In boardrooms especially, this leads to systematic underestimation of uncertainty.
07 - Mental Accounting
Money has no label. People do.
Holiday pay, bonuses and tax refunds are spent differently from regular income, even when the amounts are identical. Richard Thaler won the Nobel Prize for this insight.
