6.4.3 Understanding behavioural finance: some practical examples

Retirement savings

Research by Bernatzi and Thaler (2007) into retirement saving and pensions has shown that people often fail to make adequate provision through their working lives for retirement, whether through savings or pension schemes.

Bernatzi and Thaler have used their findings and understanding of behavioural finance to design products and processes to help ‘nudge’ people into saving effectively. One of the psychological blockages they identified was inertia, with many people simply not going to the trouble to arrange a pension plan. Consequently, one of the innovations based on their research was to make workplace pension schemes ‘auto-enrolment’ as opposed to the traditional model of ‘opt in’. In the past, each worker within a company would be offered the opportunity to meet with an independent financial adviser paid for by the firm, would be given the choice of contributing to a pension scheme and the employer would then also contribute or match the employee’s pledge of x per cent per month. By switching this process to automatically enrolling all employees to a given scheme, participation was raised dramatically. Employees would need to make an appointment to ‘opt out’ of the scheme. With inertia prevailing, their research suggested that employees would usually not be bothered to take this course of action.

Bernatzi and Thaler thus used the behavioural factor – inertia – that had prevented many from signing up to pension schemes as the means to boost employee participation.

Note: Allianz, one of the world’s largest financial services companies, set up the Centre for Behavioral Finance, of which Bernatzi and Thaler are both members, to develop their research into practical applications for the retail financial market.

The UK Government

Evidence of the UK Government’s appreciation of the importance of behavioural finance and, specifically ‘nudge’, has been reflected in the formation of the Behavioural Insight Team. Its role is primarily focused on influencing the population in areas of health and retirement savings. For a government faced with various challenges ranging from poor public finances and national debt, through to high unemployment and an ageing population, all within the backdrop of a recent global recession, the ability to influence the public’s behaviour quickly and relatively cheaply is a compelling proposition.