We live in the age of information, when more and more data is becoming available to us for free and with little effort. We can view our banking statements online and receive mobile notifications for every transaction. Digital tools can automatically consolidate our income, spending, debt, and savings from a number of different accounts, group them by category, and provide daily, weekly, or monthly snapshots. They can also help us to set up our budget and goals, and track our progress towards them. For people who are in financial difficulty or just want to learn the basics of personal finance management, there are many resources with free financial help and information.
How well do we know our finances?
In theory, with all this information at hand, a lot of people should be able to stay on top of their finances, budget, plan, and ultimately, make better financial decisions. Indeed, the assumption of rationality at the core of standard economic models stipulates that actors perfectly absorb all available information, and make decisions on the basis of this search. In reality, however, surveys in different countries indicate that consumers’ knowledge of their finances can be very poor. US consumers were found to significantly underestimate their credit card and student debt , and 48% of balance-carrying cardholders didn’t know their APR. In Australia, a survey in 2017 found that 75% of people didn’t know the size of their credit card debt, while 41% of mortgage holders had no idea about their mortgage rate, and 49% didn’t know their credit card interest rate. According to the most recent National Savings and Investment survey, 29 million Britons worried about their finances, but 73% of these never sought advice or guidance. Why do so many people make little use of all the available information, which could help them make important decisions about credit card repayments, savings, and debt?
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Why, when and how do we avoid information?
As noted above, traditional economics suggests that having more relevant information is always better. Nevertheless, people sometimes purposefully choose not to access potentially helpful information, even when it is free and readily available, or ignore such information, even when it has been directly provided to them. In behavioral science, this phenomenon is known as information avoidance, and spans many everyday behaviors related to “personal health, financial affairs, religious issues, relationship issues, and political issues” .
Avoiding exposure to certain information or not paying attention to it is quite common, but is not observed in every situation that has the potential to engender a negative affective reaction. An online experiment conducted in 2018 investigated how personal characteristics and characteristics of the potential threat affect the likelihood of information avoidance . The highest rates of information avoidance were observed in the experimental group, where participants had high levels of potential losses, high perceived relative risk, and could only have a small impact on their probability of losing money. Interestingly, there were no effects found for each of these factors individually. The likelihood of information avoidance was also associated with gender, anticipated reaction to losing money, coping style, and locus of control (i.e. whether the person believes that outcome depends on external factors such as fate or on own behavior).
Information avoidance can take many different forms. Golman, Hagmann and Loewenstein (2017) reviewed theoretical and empirical research across different disciplines and listed the following tactics: physical avoidance, inattention, biased interpretation, forgetting and self-handicapping . Narayan et al (2011) asked people to keep daily diaries of their information-related activities, from which they categorized all information avoidance behaviors into passive and active . The former relates to long-term avoidance of information, which can interfere with one’s existing beliefs or perception of self, thus causing cognitive dissonance. Personal finances are normally associated with the latter, which is a stress-coping mechanism. It gets activated when a person has already had a negative emotional reaction to some piece of information, so any further information seeking is blocked to prevent more distress.
This corresponds to what Golman et al (2017) call hedonic reasons for information avoidance — namely “a desire to avoid bad news because it will make one feel bad” . Such reasons include risk, loss, and disappointment aversion, as well as anxiety, optimism maintenance, and others. The second broad category of reasons identified by the authors is strategic information avoidance, which can be further split into interpersonal and intrapersonal types. Information avoidance in interpersonal interactions can be used to influence over other people’s actions, with many examples found in game theory. Intrapersonal reasons relate to avoiding information for commitment or self-control purposes, such as to resist temptations or maintain motivation. For example, if a person knows that receiving certain information about his investments’ performance may likely lead to an emotional response, perhaps resulting in panic selling, overtrading, or other suboptimal decisions, this person may prefer to “buy and forget”. In such a case, information avoidance can actually correct for a harmful heuristic.
So, what’s the problem?
Strategically avoiding information can therefore be sensible and result in better outcomes. What about avoiding information for hedonic reasons? If information carries negative utility from an emotional perspective, wouldn’t we be better off without it? Research on information avoidance with respect to health issues suggest that it is more likely to occur when no treatment is available . Intuitively this makes sense, as in this case information is likely to not carry many benefits for decision-making, but only to cause stress and anxiety. It is hard to use the same argument for situations related to personal finances, though, because in most cases the problems can be mitigated, if not fully resolved. According to the Money Advice Service research, the key non-demographic factors determining current financial well-being include financial confidence, managing credit, active saving, financial engagement, and considered spending . Avoiding information about personal finances, especially debt and expenditure, can therefore be a major barrier for one’s financial well-being. This leads to the question of what can be done to overcome it.
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Is there a solution?
Recent research has provided some encouraging results which indicate that merely thinking about the consequences of information avoidance can reduce one’s probability of avoiding information . In two experiments, participants were prompted to contemplate the risks and benefits of debt-related information avoidance by completing a questionnaire or watching a video. They were then asked to provide certain information used to calculate their own risk of debt problems, and offered to view this risk. In both experiments, the proportion of people who refused to view their risk was significantly lower in the treatment group than in the control. In the third experiment, people applying for a loan in a credit union received either a standard application form or a revised form which included items to prompt contemplation. People who received the revised form provided more expenditure information and higher overall expenditure estimates, which reduced the discrepancy with the estimates calculated by the credit union staff.
Another potential solution is to use technology to analyze consumers’ financial information, and give specific recommendations to help people manage their savings, expenses, and debt. There are now an ever-increasing number of financial apps providing such services. Taken together, these developments bode well for the potential to mitigate the negative effects of information avoidance — particularly with respect to financial decisions. How these improvements translate to other domains of information avoidance remains a question for future research.
 Brown, Meta, Andrew F. Haughwout, Donghoon Lee, and Wilbert Van der Klaauw. “Do We Know What We Owe? A Comparison of Borrower- and Lender-Reported Consumer Debt.” SSRN Electronic Journal, 2011. doi:10.2139/ssrn.1946871.
 Narayan, Bhuva, Donald O. Case, and Sylvia L. Edwards. “The role of information avoidance in everyday-life information behaviors.” Proceedings of the American Society for Information Science and Technology 48, no. 1 (2011), 1-9. doi:10.1002/meet.2011.14504801085.
 Blajer-Gołębiewska, Anna, Dagmara Wach, and Maciej Kos. “Financial risk information avoidance.” Economic Research-Ekonomska Istraživanja 31, no. 1 (2018), 521-536. doi:10.1080/1331677x.2018.1439396.
 Golman, Russell, David Hagmann, and George Loewenstein. “Information Avoidance.” Journal of Economic Literature 55(1) (2017): 96–135. https://doi.org/https://doi.org/10.1257/jel.20151245.
 Ferrer, Rebecca A., Jennifer M. Taber, William M. P. Klein, Peter R. Harris, Katie L. Lewis, and Leslie G. Biesecker. “The Role of Current Affect, Anticipated Affect and Spontaneous Self-Affirmation in Decisions to Receive Self-Threatening Genetic Risk Information.” Cognition and Emotion 29, no. 8 (2015): 1456–65. https://doi.org/10.1080/02699931.2014.985188.
 Money Advice Service. “Measuring Financial Capability – Identifying the Building Blocks,” no. November (2016). moneyadviceservice.org.uk/en/corporate/research.
 Harkin, Ben. “Improving Financial Management via Contemplation: Novel Interventions and Findings in Laboratory and Applied Settings.” Frontiers in Psychology 8 (2017). https://doi.org/10.3389/fpsyg.2017.00327.
About the Author
Natalia has just finished an MSc in Behaviour Change at University College, London (UCL) and plans to pursue a career in behavioral science, applying insights from psychology and behavioral economics to achieve better outcomes for consumers. Prior to her master's, she worked as a credit analyst covering bank and non-bank financial institutions. Natalia holds an MSc in Finance from Cass Business School in London and a BSc in Economics and Finance from a dual-degree program jointly run by the National Research University Higher School of Economics (Moscow) and the London School of Economics (LSE).