Blogs | February 22, 2017

Human nature in an age of fragile finances

Managing money is hard because we tend to be optimistic, impulsive and to avoid bad news, explains Nathalie Spencer.

It’s hard to manage money well. Nearly three in 10 people in Europe don’t have any savings at all. This ING International Survey Savings 2017 finding shows how fragile many people’s finances are.

We’re learning more from behavioural science about how people make decisions and often it isn’t how economists expect. Being too optimistic, avoiding bad news and sticking with what we know are all “irrational” qualities according to standard economic theory.

Yet these human tendencies are exactly what we found when we asked 14,606 people about their savings, debt and investments.

Doing nothing
In economic theory, lowering interest rates makes saving less rewarding and borrowing more attractive. So people will not save as much and instead borrow to make investments. But what we found in our survey was that although some people did change how they save in response to low interest rates on savings, more than half (56%) did not change their savings behaviour at all.

Inertia – or the status quo bias – is easy to relate to if you’ve ever thought about switching utility providers (or phone contract) but haven’t actually done so, or found it hard to stick to a new diet. Deliberately changing our habits is hard work, taking up precious headspace which could be used for more fulfilling purposes.

It can obviously be worth keeping track of interest rates and looking around for alternative options to maximise your returns or simply protect what you have already. Yet few of us do this, even if it is as easy as logging in online to change a standing order. Instead, when weighing the chance of better returns against the effort of changing what we do, we may settle for a choice that’s good enough. And “good enough” can sometimes be the better route to happiness.

Head in the sand about debt
More information is better, right? Not if there’s a chance it’s bad news: it can be psychologically easier to avoid learning that information. In our research, 10% who have personal debt say they don’t even know how much they owe.

Maybe people simply aren’t very good at keeping track. Or maybe they are sticking their heads in the sand, deliberately avoiding thinking about debt. There is even a name for dodging this information: the ostrich effect.

It can be worth keeping track of interest rates ... Yet few of us do this

Why use savings to pay off debt?
We also find that nearly three in 10 people in Europe hold personal debt while also having some savings – which presumably could be used to pay off some of that debt. This “co-holding” figure rises to 49% in the USA. Interest rates incurred on borrowing are often higher than interest earned on savings, so it makes sense to pay off any debts with some of those low-earning savings.

Indeed, research from the University of Nottingham found that the average UK household can rack up about £650 (€729) in unnecessary charges a year by co-holding. Perhaps some people don’t realise co-holding costs them money.

But for others, this might be a very reasonable strategy. For example, if people find it difficult to squirrel away savings, they may be reluctant to dip into the pot for anything less than an emergency.

Optimism despite lack of savings
We asked people how happy they are with their savings. Roughly a third of people rate themselves as comfortable or very comfortable. However, comfort is subjective and doesn’t necessarily reflect people’s actual level of savings. In our survey, eight percent of people say they are comfortable with their level of savings even though they have no savings at all. Nothing. Nada. Zip. Zilch. Zero.

This Investopedia research had similar results: 69% of Americans they surveyed were comfortable with their savings – yet many could not cover an unexpected expense of $400 without selling something or borrowing money.

Are people being overly optimistic, discounting the chance of additional expenses? Are they overconfident – believing they can pull together some funds if needed? Or are they just fatalistic? We don’t know. What we do know is that people are acting like, well, like humans. Read the full report

This article is related to the ING International Survey:

Savings 2017

Savings 2017

January 25, 2017

The sixth annual ING International Survey on savings asks more than 14,000 people in 15 countries how comfortable they are with their level of savings for 2017, especially in relation to any debts they have. We also...


Nathalie Spencer
Nathalie Spencer

Behavioural scientist at ING