The role of Neurofinance in helping people make better financial decisions





07.12.20



I recently attended a Neurofinance course at the University of Liverpool, delivered by Vasilis Kallinterakis (an excellent lecturer) and am fascinated with the work in the area of Nerurofinance.






Currency has changed extensively through the decades, from the exchange of goods and services to cattle, seashells, coins, notes and now digital currency; and digital currency is not yet fully integrated for all to benefit.


We live in a society where we need money to get by – buy food, pay for heating and water, travel to work and much more. We need money to cover our basic needs. Therefore, all individuals must be equipped with the skills and resources required to enable them to pay for goods and services.


Financial education is a new area of focus that is set on upskilling people to make well informed financial decisions. Financial education refers to the skills and knowledge that allows individuals to make smarter money decisions. Topics include basic budgeting, understanding debt and credit, using electronic banking services and so on.


Encouragingly, personal finance education was introduced as a non-statutory element of the National Curriculum education framework in 2000. Unfortunately, there are major inconsistencies across schools, allowing students to leave formal education with potentially inadequate education (1).


Financial Capability


A lot of research and effort is being channelled into delivering the best financial education, but not enough effort into identifying the best approach to improving financial capability holistically.


Financial capability is the combination of attitude, knowledge, skills, and self-efficacy needed to make and exercise money management decisions that best fit the circumstances of one’s life, within an enabling environment that includes, but is not limited to, access to appropriate financial services (2)


An individual’s ability to make well informed financial decisions relies on more than simply being financially educated. People need to be equipped with the skills, belief, and confidence to utilise this new information and a supportive environment to act upon it.


Financial capability is measured over three main areas. The first is financial education, the second considers the level of access to financial products and services, and the third focuses on having the right attitude to be able to make the right financial decisions.


The second area, financial accessibility, centres on the need of an enabling environment, this is an environment that allows people to act on their desire to do so. Many issues around the world cause barriers to accessing financial products and services. Many people are unbanked, excluded, live within communities with cultural barriers stopping women seeking financial independence, or systemic barriers that keep groups of people struggling to access credit – such that being educated on financial best practices, is not enough to change their trajectory.


The third area focuses on an individual’s attitude towards money. An individual’s attitude plays a significant part in the money decisions they make. People are uniquely shaped by a range of biases and heuristics, which is a result of generational, systemic, societal, and psychological factors. Our brains hold a complicated web of emotions, thoughts and beliefs about life and money – these directly impact the day to day decisions we make and sit within our subconscious.


An introduction to Neurofinance


Neurofinance is a young discipline that studies the brain processes associated with financial related behaviour. Neurofinanace develops on the findings of behavioural finance which focused on the psychological tendencies that influence our behaviour, by observing biological and neural influences. It combines insights from psychology and neuroscience with theories of finance, using experiments and studies about how we evaluate financial decisions. It investigates how financial decisions are influenced by emotions, psychological biases, stress, and individual differences


Neurofinance confirms scientifically that a large portion of our financial decisions are made with our automatic mind (below our consciousness). This means that we are making financial decisions with our subconscious emotions. Every aspect of the decision-making process is influenced by the feelings of the decision-maker (Lucey and Dowling, 2005).


I truly see Neurofinance as an important area of study as it is providing a direct link and supporting the notion that the improvement of financial capability should include positive behaviour changing efforts, including systems that target the mind, thoughts processes, and habits.


Financial capability is about behaviour change; a growing body of industry research reveals an important gap between knowing and doing. We need to make the use of formal financial products and services beneficial for the user, which means identifying their needs and wants, providing solutions that fit their lives, and utilising behaviourally-informed practices to target subconscious bad money habits.


References

1. https://themoneycharity.org.uk/

2. https://www.microfinanceopportunities.org/