Why are we so bad with money?

Why are we so bad with money?

Oxford White Paper argues psychological forces can drive this despite good financial education. But if we understand it, we can change it.

Tired after a day at work? Casually shopping online, when you see an expensive item you do not need? You know you do not need it. You know it does not make sense. You may not have the money in your account. And yet…you click to buy.

But, according to research, this may not be a sign you are “bad with money”. A new ‘White Paper’ from Saïd Business School, University of Oxford, Why smart people make bad money decisions, argues the psychological forces behind these moments are so powerful that even the best financial education struggles to compete.

The research team comprises Professor Pinar Ozcan, who heads a major research programme investigating financial inclusion; Henry Majed, Visiting Fellow at Oxford Saïd, former neuroscientist and Christina Paul, family finance and strategy coach and co-founder of Halo Money. Drawing on around 60 studies and reports across neuroscience, psychology and behavioural economics, including the largest meta-analysis of financial education to date, they argue three factors shape these decisions:

Emotion and habit
Shame and stigma, and
Stress and scarcity.
Professor Ozcan maintains: ‘For many years, the dominant assumption has been that better financial decisions come from providing more information. The evidence suggests the reality is more complex. Decades of research show financial behaviour is shaped not only by knowledge, but also by emotion, habit, stress and social context. If we want to improve financial outcomes, we need to understand how people actually make decisions, not just how traditional economic models assume they should.’

According to the White Paper: ‘Emotion and habit shape decisions in ways rational models do not capture; shame and anticipated stigma drive avoidance that compounds difficulty; and stress and scarcity impair the cognitive functions required for planning.’

Henry Majed explains: ‘The neuroscience helps explain the gap between knowing what to do and actually doing it. Stress changes how we think, shame can make us avoid difficult decisions, and habits override our behaviour without us realising. However, by understanding these mechanisms we can work with them to make better decisions.’

The White Paper is grounded in a review of several decades of research across behavioural economics, psychology, neuroscience and financial education. One of the central findings is that knowledge alone often has only a limited effect on behaviour because financial decisions are shaped by emotions, habits, stress, scarcity and social pressures as much as by information.

Professor Ozcan explores this more broadly through the Oxford Future of Finance and Technology Initiative, which examines financial inclusion, financial capability and the ways emerging technologies can support better financial decision-making. This research consistently points to the importance of understanding the behavioural and psychological dimensions of finance, rather than assuming people will make optimal choices simply because they have information.

According to the White Paper, research shows some 13 million UK adults have low financial resilience, and one in three live on a ‘financial knife edge’, with 49% living from paycheque to paycheque. Meanwhile, just 26% of households are seen as financially secure. The problem is replicated worldwide. The official response is to provide financial education. But the team argues the evidence shows this is most effective when it incorporates behavioural support or emotional engagement.

Christina Paul maintains: ‘Understanding your relationship with money can be liberating. Once you recognise the beliefs, emotions and habits influencing your decisions, you can begin to make different choices. Financial wellbeing is not about being perfect with money. It is about feeling more confident, capable and in control of your choices.’

ENDS

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About Saïd Business School

Saïd Business School at the University of Oxford is an innovative and vibrant business school embedded within a 900‑year‑old university, and home to QS’s highest ranking Executive MBA in the world. Educating global business leaders, change makers and innovators across every industry and sector through accredited degrees, diplomas for undergraduates and postgraduates and in-person and online Executive Education programmes. In its thirtieth year, Oxford Saïd consistently delivers ground-breaking research and exceptional teaching, creating impact from within.  https://www.sbs.ox.ac.uk/