People face a barrage of data on a daily basis, making it far too easy to take their minds off their money
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While technology has the potential to act as a tool for people making financial decisions, that doesn’t make it automatically helpful. Aside from the fact that tech sophistication doesn’t equate to financial savvy, the online platforms people use to manage their money might also be vulnerable to cybercrime.
And there’s also a risk of people actually becoming worse decision-makers when they use technology. As Dr Shlomo Benartzi wrote on the Wall Street Journal, people’s use of digital devices “creates a shortage of attention, which can lead to poor financial choices.”
“Not so long ago, the main scarcity was information,” said Benartzi, who is a professor and co-head of the behavioral decision-making group at UCLA Anderson School of Management. “But now we are drowning in data. What we lack, instead, is the ability to properly process it.”
Fortunately, he said, the tendencies and behaviours contributing to poor financial choices can be mitigated. For example, he referred to experiments by academicians Baba Shiv and Alexander Fedorikhin showing that people who multitask are less able to resist immediate gratification, meaning an overloaded brain is more likely to spend than save.
“[T]he complexity of financial decisions benefits from a reflective thought process,” Benartzi explained. “If you have to make major financial decisions on a screen, you should at least do it in airplane mode or ‘don’t disturb’ mode.”
Next, he cited research from Britain’s Behavioural Insights Team showing that people are considerably less likely to successfully navigate complex websites in the morning, possibly because of the chores and tasks that have to be done at that time. “[E]nsure you are making your hardest choices—especially financial ones—during the lulls in your day,” he advised.
He also noted that people are susceptible to a “first glance” bias, where the immediately visible information — not necessarily the most important or relevant — is used as a basis for decisions. “[T]he error often leads us to focus on short-term results, as we fixate on the recent performance of a stock or investment,” Benartzi said. To combat that tendency, he said, people should ensure the time horizons on their financial websites match their own investment timelines; those with a long horizon may want to consider deleting the stock apps on their phones.
People can also free up mental bandwidth using certain smartphone tools. Aggregator apps can help consolidate information across multiple credit cards or savings accounts, making it easier to track trends and patterns in spending or saving. People who make regular, predictable bill payments or fund transfers could also consider automating those transactions.
Finally, Benartzi said, there’s mounting evidence that people tend to make bad decisions within a short distance of their phones. Research he did with a colleague, John Payne of Duke University, suggested that people who take a financial literacy test on a mobile device do worse than those taking the same test on paper. And other recent work suggests people’s cognitive capacity declines when they have their smartphone next to them — even if it isn’t turned on.
“During your next meeting, perhaps your adviser should suggest that you leave your phone behind at a ‘charging station’ with the receptionist,” he said. “That way, if you get any urgent calls, you can still be notified.”
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