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?
References
[1] 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.
[2] 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.
[3] 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.
[4] 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.
[5] 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.
[6] Money Advice Service. “Measuring Financial Capability – Identifying the Building Blocks,” no. November (2016). moneyadviceservice.org.uk/en/corporate/research.
[7] 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 Shakhina
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).
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