Behavioural Economics

What is it?

Behavioural economics is the study of how emotional, social and cognitive factors influence economic decision-making, and the financial consequences of these decisions. It explores why people sometimes make irrational decisions.

Take saving for retirement as an example. Generally people are living longer and logic suggests they need a bigger retirement savings pot to last them for this longer period of time. The rational decision would therefore be for a person to continue working for as long as they can to keep building this retirement savings pot. However, we know this is often not the case. Behavioural economics comes into play. People will often look to retire as early as they can for a whole host of reasons which may not be rational, but which will impact their decision-making all the same.

Perhaps when faced with confronting mortality or deteriorating health for example, emotional responses that cloud clear thinking are triggered. Similarly if we naturally think about what is happening in the short-term, we can struggle to make decisions affecting the long-term.

It's not just 'them', it's 'us' too

There's a great deal of focus on client behaviour and the influence of behavioural biases on decision-making, and quite rightly, as it's an important factor to look out for. We're all human after all.

Advisers and paraplanners need to be aware of the influences that could impact their recommendations to clients, and how they're expressed. For example, whether you present an annuity as a form of insurance or an investment product can impact how clients perceive annuities.