The Think Forward Initiative is focused on how we make financial decisions. Kirsten Rohde is an expert in this field; she is a professor of Behavioural Economics at Erasmus University Rotterdam (The Netherlands). Rohde focuses on intertemporal choice, an area within behavioural economics which analyses the trade-offs people make between the present and the future. The online magazine ing.world interviewed her recently. In this article she discusses how we can benefit from more insight into people’s financial habits.
Why is it important to understand financial behaviour better?
“A better understanding empowers companies, policymakers, special interest organisations and others to make more effective decisions. Companies, for instance, can use this input to adapt their products. Government agencies and special interest organisations can improve their services and support for individuals.”
What is your biggest challenge in gaining a better understanding of behaviour?
“Trying to get a better understanding of the trade-offs people make between today and tomorrow, and the inconsistencies in these choices. If you only feel the effect of your choices in the distant future, you will make different choices than if you feel the effects immediately. I want to find out what aspects of the future cause this, and to what extent. Is it because the future is unclear (i.e. not knowing what the circumstances will be) or is it because tomorrow appears to be so unimportant for today (I don’t want to worry now about my future needs)?”
To what extent can sensible habits be learned and less sensible ones unlearned?
“Overloading an individual with information – even relevant information – doesn’t work. If you, as a bank, communicate too much information, chances are that the customer will be unable to see the wood for the trees and end up making no choice at all. People are not entirely rational: if you give them a choice of eight investment portfolios, of which seven have a high risk profile, many will be inclined to spread their money evenly over the eight portfolios. But if you, as a bank, make some careful suggestions, you’ll probably get better results.”
“Overloading an individual with information – even relevant information – doesn’t work”
Any suggestions for a bank that wants to do its bit for society?
“What could work is a few gentle nudges in a certain direction. That way, you can help the customer make the right choices by keeping your information simple, relevant and not too detailed. Transparency is important, and so is showing your intention to put the customer’s interest first. What a bank could use in a good way is the knowledge that people are generally creatures of habit. A temporary nudge can produce permanently better results.” In line with its purpose and the general appeal of the European Economic and Social Committee (EESC), ING and some renowned partners have decided to bring together experts, consumer interest organisations, policymakers and other firms. The objective is to clarify the most important challenges regarding ‘behavioural biases in financial decision-making’ and to agree on joint actions.
Kirsten Rohde is professor of Behavioural Economics at Erasmus University Rotterdam. She mainly focuses on intertemporal choice, an area within behavioural economics which analyses the trade-offs people make between the present and the future. Her interest lies in developing ‘nudges’ to help people overcome this type of irrationalities. Rohde believes in nudging, an intervention based on scientific behavioural knowledge, where people are given a little nudge in a certain direction to help them overcome irrational behaviour, such as the gap between planning and doing.