So you think you are financially savvy! Perhaps you shoud read this ...

Elizabeth O’Neill spent an afternoon with an expert in behavioural economics, a new field that looks at our attitudes to value. She thought she was financially savvy, but now...

So you think you are financially savvy! Perhaps you shoud read this ...

BILLS, bills, bills. You get to a certain age and you’re drowning in a sea of them. I always considered myself savvy when it comes to personal finance, good with bargains and cutting my cloth to fit my measure.

I swap insurers every year. House prices are moving upwards so that massive monthly mortgage payment is no longer falling into a black hole. One day, I tell myself, I may see a return on my investment. Aside from a stagnant credit card balance, there are no overdrafts or arrears.

So, according to my own assessment I operate in my own best interests financially speaking and all in all things could be a lot worse. Of course, my conscience or inner accountant tells me things could also be a lot better.

I have no savings — zero. That’s 0. No holiday fund, no rainy day fund. I also pay monthly energy and telecom bills unquestioningly and never switch. Yearly, they run into the thousands. Somewhere in the recesses of my mind I think I must look into that, but I never do — that’s gas, electricity, broadband and phone.

So am I financially savvy? Do I operate in my own best interests? Can I make rational choices about the value of something?

Behavioural economics is a very new and cutting edge science, which tests the overriding assumption of traditional economics that humans always operate rationally and in their own self-interest. It’s a hybrid of psychology and economics that was first applied by Daniel Kahneman. A professor of psychology at Princeton, he won the Nobel prize for economics in 2002. He also wrote Thinking, Fast and Slow.

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This new science is beginning to transform US and UK policymaking. In Ireland, we have our own small lab operating out of the Economic and Social Research Institute near Grand Canal Square in Dublin.

The lab’s chief, Pete Lunn, put out a call on the radio for volunteers, so armed with my own biases that I am rational, savvy and good with money, I signed up for psychological testing.

The lab is effectively an office with two computers, but four large screens, one showing what, to my eyes, looks like computer coding. There are no brain scanners or wires to be attached anywhere.

A whiteboard on the wall is adorned with impressive squiggles, Xs, Ys and curved lines. This is where raw data is spun into mathematical equations that try to explain consumer behaviour.

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Lunn is an experimental psychologist, neuroscientist, economist and former Newsnight producer. He set up the Price (Programme of Research Investigating Consumer Evaluations) lab in 2013.

His research programme is funded by the Central Bank, ComReg, the Commission for Energy Regulation, and the Competition and Consumer Protection Commission. As I prepare to do combat with the first computerised test, he tells me I am participant number 544 and I can win a €50 shopping voucher if I guess all answers correctly. Most volunteers also get €25 and a cup of tea.

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So what am I judging and why? It’s a product I’ve never seen before and I have to put a price on it. First up is a Mayan pyramid and the only clue to value is simply it’s less valuable when more mouldy. A passing acquaintance with real Mayan pyramids does not help my valuations — I am 100% wrong in all guesses as the shopping voucher moves further and further out of reach.

The product in the second test is a golden egg and there are many of them. This time the value is based on three things: size, pattern and the sharpness of a cross in the middle. Plucking figures from the sky, I am again 100% wrong. I’d like to say it was because I was distracted trying to estimate the value of the golden goose, but that thought was retrospective.

What have Mayan pyramids or golden eggs got to do with judgment?

Pete explains: “What this is all about is what consumers do when they are faced with something they’ve never seen before and they have to price it. This experiment is testing what helps a person make a decision... how do we benchmark products? How do consumers map product attributes onto prices?”

During our conversation, Pete stresses that behavioural economics is a brand new science in its early stages. How did he become a pioneer of something so new?

“I came back into research from journalism in 2006,” he explains. “I have a PhD in neuroscience and I was recruited by the BBC as a scientist who could communicate when they were struggling with the BSE crisis which pretty much made my career, to be honest.

“If you’re a scientist and you end up in the media, you get drawn towards economics whether you like it or not and the reason is that these are the people using analyses models and evidence to answer problems.

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I got really frustrated at the BBC getting beaten up by economists in arguments in particular with Evan Davies, the Newsnight economics correspondent. He seemed to have access to this way of thinking and somewhere deep down I felt he was wrong so I went and retrained as an economist.

“No one had heard of behavioural economics at that time, but I got interested because I went into my first lecture and looked at the assumptions that economists make about consumers and I thought ‘You’re kidding, that’s what it’s based on’.” To date, Pete has only met one other neuroscientist who retrained as an economist.

Back in the lab, the next set of tests are a little more successful when I have to guess real prices from the Dublin property market. This was more familiar territory. When Mayan pyramids are re-introduced it all goes back out the window.

Apparently the Dublin market is hidden in the pyramid test, but I’m told I’m one of the few volunteers to not realise this. My sense of my own economic judgment is now on the floor.

Pete’s lab has been running for three years and what he has found so far is that the more complex a financial product the less rationally a consumer will behave. It is normally supposed that if a consumer has enough feedback and experience they will chose wisely. However, that might not necessarily be true.

“There might be some products that have so many attributes that the mathematics that relate to those attributes is so complex it becomes a problem. If that is true of financial products that suggests there may be some scope to simplify products.”

He has also found through his testing that people tend not to see gains unless they are above 40%. This applies to switching energy providers. Unless you can see a 40% gain you are not going to switch.

We all know it’s a hassle, it involves having old bills and account numbers to hand. Also, the industry norm is to frame price in terms of discount, ie if you switch you’ll get a 15% discount, so it’s difficult to calculate and compare annual prices.

This comes back to the root finding of Daniel Kahneman in terms of economic policy and human behaviour, namely loss aversion. Studies continually show that people will do anything to avoid financial loss.

While some of this seems self- explanatory in terms of human behaviour, it’s evolutionary in economics and policymaking as the end result will be to inform the policymakers and ensure consumers are better informed. As for myself, I won’t be buying a Mayan pyramid any time soon and I really should look at the big switch, regardless of jargon. Some day.

Anyone interested in volunteering at the ESRI Price Lab should go to www.esri.ie/be

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