Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances, as psychologist Daniel Kahneman points out in his bestselling book “Thinking, Fast and Slow.”
How come? When we make decisions fast, we rely on habit and intuition, forms of thinking that are difficult to change or manipulate, Kahneman argues.
But the good news is that while formal education and training may not change how people think intuitively, technology can help lessen the negative impact of common decision-making mistakes on personal finance outcomes. Here’s a non-comprehensive look at how technology is now tackling three behavioral finance biases that can contribute to poor decisions.
Financial Bias 1: Salience
Salience refers to how noticeable an event or information is. According to behavioral finance research, people tend to act on easily recalled and colorful information and ignore data that are less readily available for mental processing (think “out of sight, out of mind”).
A number of budgeting apps aim to help users address this bias by collating debt, bills and spending information in an easily accessible interface. The idea is that having all of this information readily available can make it easier for people to be proactive about their finances.
For example, I like how Mint Bills aims to help users stay on top of their bills by sending reminders when bills are due, letting users pay bills immediately or via scheduled future payments. Meanwhile, Level Money tells users how much they can spend on a given day, once they have connected their bank accounts and entered their income, bills and desired savings.
Financial Bias 2: Present Bias and Procrastination
The present bias refers to the tendency to overweight rewards today and underweight pain and losses in the future, leading people to make choices about the future that their future selves would probably prefer not to be making. In other words, the present bias often leads people to push strenuous or boring activities into the future, i.e. to procrastinate. It applies to many areas of life, from eating and living healthily (think buying a gym membership but hardly using it) to saving and investing. For instance, many people realize that they should save for retirement, but they prefer to start saving tomorrow or next month.
Many goal setting apps aim to address this bias by helping users stay on track with their goals via frequent reminders, penalties, peer pressure and game-like features.
For example, stickK, developed by Yale behavioral economists, penalizes users for not reaching goals by donating their money, depending on the chosen settings, to a charity, to friends or to an organization the user opposes. Users can also make their goals public and invite friends to serve as supporters for encouragement, peer pressure and added accountability. Elsewhere, Coach.me, another goal setting and tracking app that uses social community for motivation, offers paid personal coaches across a range of personal finance goals.
Financial Bias 3: Loss Aversion
Loss aversion refers to people’s tendency to feel the pain from losses much more acutely than the joy from similar-sized gains. Loss aversion is often cited as one of the main reasons people have trouble saving for the future.