Most insights into human psychology can be found scattered throughout common metaphors and proverbs. For example, do you see “the glass half empty or half full?” This fundamental orientation is just one of many ways through which we see and experience life.
Behavioural psychology relates to the glass analogy as optimism or pessimism bias. Optimism - underestimating likelihood of negative events, and pessimism - overestimating the likelihood of negative events. There’s not a lot of middle ground when life is framed like this.
Being all encompassing, these lenses can often extend to our financial decision making and behaviour.
The optimist might feel comfortable about their financial future, they may be happy to take risks and just trust that “she’ll be right” (an old Aussie expression). Maybe the optimist spends rather than saves, overextends debt, or makes some high risk investments assuming the future will take care of itself. They assume they’ll get rich, even if they don’t have a plan, and won’t need to worry about things like superannuation. Another term for this is “the ostrich effect,” a denial and avoidance of challenging and less optimistic information. If I can’t see or hear it, then this can be taken as confirmation that all is well.
In contrast, the pessimist might be planning and saving for a rainy day, making a little extra contribution to their superannuation and making safe investments for future financial storms. They may have an underlying unease ranging from just being cautious through to constant worry. A little caution may be prudent, but constant worry can be paralysing.
It doesn’t have to be this way. Both optimism and pessimism can benefit from a little rational information to aid decision making, but the problem here is our fundamental decision making psychology - cognitive effort, poor habits and incentives, jumping on bandwagons and social norms, and poor comprehension of probability and risk. We need some healthy shortcuts for a realistic view.
Financial services of the future can play a vital role here by providing transparent and digestible information coupled with an honest intention - we need to equip people with the tools and technology to make good decisions about their life, future, and money. Or as we like to call all this, a measured optimism.
Understanding the behavioural psychology behind our financial decisions helps us diagnose what is really going on and find a way forward. Knowing that people are susceptible to being overly optimistic suggests an opportunity to reflect a more realistic and maybe less rosy view of their financial future. Likewise, the pessimist can gain a sense of control and reassurance through greater transparency and tools to comfortably control their finances.
At Zuper we’ve drawn on these, and other behavioural principles, to create a new type of superannuation company. We’ve created tools to make it easy to find, combine and roll-over your super. We’ve opened up a range of exciting new areas for you to choose to invest in such as technology and renewables. We’ll also help you save money now, so you have more later with our Super Top-Ups, and we make it easy to ask all your uncomfortable or embarrassing questions with Zena, our always on chatbot.
I may be biased, but I’m pretty sure the glass - and our collective future - is in fact, half full.
Kris White is the Chief Behavioural Officer at Zuper. Using behavioural science and evolutionary psychology his goal is to help the Zuper community increase their wealth and wellbeing.More