Dr David Halpern is Chief Executive of the UK Government’s Behavioural Insights Team (BIT). Following this year’s LIBF Henry Grunfeld Lecture, which he gave in January, he tells us how to apply behavioural science to banking and finance.
Over the last ten years or so, the UK Government has used behavioural insights – or ‘nudges’ – to try to get us out of our bad habits.
“The most famous example,” says David Halpern, “is around changing defaults on pensions.”
He adds that for years people wondered why workers weren’t saving more into their pensions. “Actually, it just turns out we can't be bothered to fill in the form.”
The answer was to move from an opt-in to an opt-out system, which brought ten million extra UK workers into a pensions savings scheme. Now 91% of eligible workers are saving for a pension.
“That's behavioural finance in action.”
How behavioural science works
“Your brain is interested in trying to make inferences about the world,” he says. “And it uses shortcuts.
“Many people in banking and in economic policy learned theories, which we now generally think are wrong, about human behaviour and cognition.”
There’s an assumption that people are more rational than we really are. “So the question is, can you just alter the choice architecture?”
Take, for example, people who are falling into mortgage arrears.
“So this was done with a bank in the UK,” says David. “One way of getting them just to engage with their mortgage is through better communications.”
The BIT found that more people responded to prompts when letters were personalised and written in plain language.
“It turns out if institutions say things in ways that people understand, people are more likely to trust them.”
The ethical considerations of behavioural science
“Behavioural science is like any other form of knowledge,” says David. “You can use it for good or for bad.”
He points out that casinos use “a massive amount of really advanced behavioural science”.
“Vegas is like a masterpiece of behavioural science in action.”
There’s the lack of daylight that helps you lose track of time and the constant sound of someone apparently winning in the background. And, when you gamble your money at a casino, you’ll have lots of moments when you almost win just to get the dopamine going.
But governments, institutions and businesses can also use behavioural science more positively. The work that BIT has done with banks like Monzo is a good example.
“For us, the key next target is rainy-day savings,” says David, adding that around eight million people in Britain are in low-level debt. “How would you lift people out of that?”
Potential for good
Of course this is where regulators need to get involved.
“One of the key challenges for regulators is to make sure that competitive pressures are harnessing the innovation of banks to use behavioural techniques for good, rather than for bad.”
If this happens there is huge potential to do good with behavioural science – from encouraging better personal finance habits to prompting people to make their pensions more sustainable.
“Ultimately, banking is about moving resources in society and the economy,” he says. “The opportunities, I think, are very, very large.”
He cites India as an example, “You could move a whole economy of a billion people out of revolving low-level debt into a nation of savers and investors.
“So it’s an exciting time and hopefully we’ll look back on it and just think well, what an amazingly cool time to be either a policy-maker or indeed a banker.”
Centre for Digital Banking and Finance