Are You Making Bad Financial Decisions Because of Information Avoidance?

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 [1], 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?