SIMON BROWN: I’m chatting now with Adam Gottlich, head of behavioural science – client solutions, Standard Bank. Adam, I appreciate the early morning time. Behavioural science. I want to delve first into what it is and how it can play a role in consumer choices. In essence, we are human beings, we make lots of bad decisions and behavioural science is trying to in a way nudge us – and of course, there’s a book around that – to make better financial decisions.
ADAM GOTTLICH: Good morning, Simon. Yes, absolutely. Behavioural science is a multidisciplinary approach to understanding human decision-making. It draws on insights from neuroscience, cognitive science, psychology, economics and anthropology to understand why we behave in the way we do, and why we make the choices we make. It’s a very scientific pursuit. It draws on a lot of excellent academic research and the applied scientific method to help discern how to help people make better decisions.
But in order to help them make better decisions, you often have to understand the psychology of what stands in the way of those decisions. Those are often referred to as cognitive biases or cognitive bottlenecks.
SIMON BROWN: Those exist in every field. There is probably a heck of a lot more. I was chatting with someone yesterday about one of the biggest challenges to the investment community. The threat, the competition for example, is actually scams because we want to get rich in a hurry. We believe that. In essence, if we can understand people’s processes, their fears, their greeds, their emotions, we can kind of guide them and help them make markedly better financial decisions.
The implication then is that if we make better financial decisions we are ultimately better off financially. In other words, we’ll have more money and we’ll retire better.
ADAM GOTTLICH: Absolutely. I think understanding those bottlenecks is very important in terms of designing solutions to overcome them. You can’t paint everybody with the same brush, and every choice environment is different in terms of what stands in the way of making better decisions. But there are certainly some human universals that we know to be true that really undermine our future utility and our good decision-making strategies.
As an example, we typically don’t deal well when a lot of choices is presented to us. When there are a lot of options presented to us we typically respond with no-decision. But in the first place, we actually seek out that amount of choice. So we like choice, but hate to choose. We don’t save for the future because we are incredibly present-biased; that’s the manifestation of a decision-making strategy that’s thousands and thousands of years old which is being misapplied in today’s complex financial climate.
We don’t consider all our options. We often choose the default option just because it’s the easiest option, not necessarily because it’s the best option. Sometimes, as we’ve seen a lot in Covid over the past year or so, people take action not because it’s the right thing to do but to regain a sense of control, and as a result potentially undermine their own future utility by making a poor decision at the moment.
By using behavioural science you can absolutely help somebody make a better decision by understanding what’s undermining them in the immediate term.
SIMON BROWN: And for financial institutions, Standard Bank and others the world over, taking this into account you can actually make better products designed for this. I’m thinking the option one. I know an experiment that was done at one of the universities in the US where in terms of their retirement annuity, the 401K, the default was already ticked, and you had only two options, yay or nay. That was trying to guide and steer people to a decision. Truthfully we’re being a bit nanny here, but it’s for their own benefit.
ADAM GOTTLICH: Yes, absolutely. There’s a concept within behavioural science called asymmetric paternalism. Basically, it’s providing an option of what we think is the best option and nudging people to choose that option without restricting any of their freedoms. So people can absolutely make whatever decision they want, but we help and try to nudge them towards a better decision.
The study that you’re referring to absolutely generated a huge amount of value for people. It’s the Save More Tomorrow programme, which has generated billions of dollars worth of savings for over 15 million Americans because they understood three key bottlenecks. They understood that you need to really make a commitment to long-term saving by overcoming present bias. They wanted to create a default option that was easy. There was no friction, and they wanted to reduce loss-aversion by making sure that your contributions were tied to salary increases, so there was never sort of any situation where you were out of pocket.
I think financial institutions are seriously investing in behavioural science because it’s the ultimate form of customer-centricity, considering the human at the end of the experience. You’re seeing it manifest in a number of ways, from the way that we design products to an increased focus on financial literacy, to making sure that we are more deliberate about the way we communicate with customers, just to make sure that we are being human-first and human-focused. And especially now as we are becoming more and more digital, I think behavioural science is the way to deliver human experiences digitally.
SIMON BROWN: I have to point out it does not restrict freedom. This isn’t to restrict someone in what they’re doing. It’s nudging, it’s helping them.
Adam Gottlich, head of behavioural science – climate solutions at Standard Bank, I appreciate the early morning.
Listen to Friday’s full MoneywebNOW podcast here.