Are Your Employees’ Behavior Biases Causing Them Financial Harm?

According to a Morningstar report, Understanding the Financial Impact of Behavioral Biases¹, your employees have thousands of decisions to make each day. To make things easier, they rely on educated guesses, rules of thumb, and shortcuts – most of which they are unaware of. These are known as behavioral biases. 

Having a behavioral bias is very useful. It allows someone to react quickly or make a decision without a lot of effort. For example, when picking which of the many peanut butter varieties to grab on the shelf, the bias might be:

• The name brand is better than the store brand
• Creamy is better than smooth
• Buying in the larger container saves money
• I only buy peanut butter when I have a coupon

Because of a bias, the consumer can walk into a crowded grocery aisle and pick peanut butter without expending too much energy. Unfortunately, not all biases are beneficial, especially when applied to finances. 

4 Biases That Cause Problems

In their research, MorningStar found four biases that affect financial decisions:

• Present Bias: Giving greater value to rewards now than to better rewards in the future.
• Base Rate Neglect: Deciding how likely something is to happen by using easy-to-find information without looking at the probability of it actually happening.
• Overconfidence: Believing your own abilities or information are greater than they are.
• Loss Aversion: Being too afraid of losses, especially relative to likely gains.

What can you expect from someone who has one of these biases? 

• Lower savings account balances
• Smaller retirement savings
• Higher credit card debt
• Spending beyond their means
• Not paying bills on time
• Lower credit scores
• Lower net worth

It turns out that 98% of respondents to the study have at least one of the four biases that lead to poor financial health. In fact, the results of poor financial health hold true even when controlling for demographics, cognitive ability, and financial literacy.

Overall, the lower the bias score, the better a person’s financial health.

The Need to Recognize a Bias

The problem is that your employees are unlikely to recognize their biases on their own. They can take financial literacy classes, learn all the facts, even understand the necessary behavioral changes, and still make poor financial decisions because they are unaware of the bias that is driving their action.

That’s why a comprehensive financial wellness program will help employees understand their relationship with money and recognize the biases that sway their financial decision-making.

At Enrich, we offer a financial wellness personality assessment called Your Money Personality. This assessment is similar to a Myers-Briggs Type Indicator that assesses financial behaviors across categories like outlook, emotions, focus, and influence.

Your Money Personality helps employees understand their dominant traits, strengths, and challenges surrounding finances, which, in turn, helps them make long-term changes.

But how does taking the “Your Money Personality” help employees reduce the effects of a bias? It’s simple. First, the assessment points out the strengths and weaknesses of the user. Second, it provides specific steps to reduce the effects of the weaknesses. 

Present Bias

Some people refer to those with present bias as being impatient or needing immediate gratification. Generally speaking, someone with present bias will choose a lower payout today rather than have to wait for a higher payout later.

The study found that those with present bias are likely to spend more than they make, use credit cards to make up the difference, and fail to pay bills on time. 

Present bias relates to several areas of the “Your Money Personality” assessment.

• Present-Focused: Those who are present-focused live for the day. They assume that everything will work out in the end even if they don’t pay attention to it now. Even if they know the behaviors they need to adopt, they tend not to think much about how these actions will affect their financial future.
• Relaxed: Those whose emotions concerning money are relaxed tend not to worry about money or going into debt. They enjoy spending money now and will worry about how to pay it off down the road. In general, they only consider how spending/saving/investing makes them feel in the here and now.
• Fun-Seeker: For fun-seekers, money is the means needed to enjoy life. A fun-seeker enjoys shopping and treating themselves. When it comes to money, they have the “you only live once” attitude. This often leads to high debt.

Of course, these traits do have a positive side. For example, those who are present-focused are good at budgeting for single events like a shopping spree. They are also often generous and optimistic.

However, the challenges of vague financial goals, stressing over unimportant details, or not having enough money set aside for emergencies or retirement can cause undue financial stress.

To alleviate that stress, the assessment offers some advice to those with present bias, such as:

• Learn about the time value of money
• Prepare for emergencies
• Sign up for online bill pay
• Create a budget with “fun” built-in
• Put online purchases into a wishlist rather than purchasing immediately

Base Rate Neglect Bias

Determining the probability that something is likely to happen is not easy. In fact, many people look for fast, available information to make a decision.

For example, people with base rate neglect were 11 times more likely to have a bad credit score. This may stem from information leading them to believe that certain behaviors are not likely to change a score, or information stating how quickly they can change a poor score.

When taking the “Your Money Personality” assessment, those with Base rate neglect bias may fall into one or both of these categories:

• Optimistic: These employees are hopeful about the future, believing that things will work out. They tend to associate with other optimistic people, which reinforces their behavior and attitudes. Because of this faith that everything will work out, those who are optimistic may not adequately plan for their financial future.
• Change-seeker: A change-seeker is an adventurer, looking for the next great thing to do. They enjoy spending money on experiences and often do not look at the overall cost or financial implications of doing so. 

On a positive note, those with these financial personality types are willing to take suitable risks and have little financial stress. Unfortunately, these individuals are less likely to save enough for retirement and spend money spontaneously, without considering the consequences.

Here are a few suggestions from “Your Money Personality”:

• Save for future experiences 
• List all associated costs before making a big financial decision
• Gather all financial information in one place to get a better idea of your financial picture

Overconfidence Bias

Overconfident employees believe that they understand financial topics enough to make wise decisions – even if they don’t have all the information they need.

The study found that those with a high overconfidence bias were more likely to have a lower checking account and savings account balance. Additionally, they were 3.33 times less likely to save for retirement.

“Your Money Personality” sees the overconfidence bias in those who are:

• Confident: These individuals don’t know what they don’t know, so they overestimate their financial abilities. They make quick, efficient financial decisions but may make these decisions without all the necessary information.
• Independent: Independent employees are self-reliant and rarely ask for advice from others, preferring to do their own research. 

The good news is those who are confident and independent are responsible with their money and don’t feel the need to "keep up" with others financially. However, those with an overconfidence bias may be more likely to miss warning signs and be less likely to listen to the advice of those who have more expertise in the area.

For these employees, the assessment recommends such actions as:

• Evaluate the sources of information available to you
• Get a second opinion before taking on a risky financial endeavor
• Get an accurate picture of your net worth

Loss Aversion Bias

The definition of loss aversion is one who prefers avoiding losses when compared to acquiring an equivalent gain. One psychological theory suggests that individuals with loss aversion suffer twice as much pain as they would gain in happiness².

The study found that those with loss aversion bias were much more likely to have lower 401(k) savings. This is likely due to their fear of losing capital when investing money.

Those with loss aversion bias may find that “Your Money Personality” assessment puts them in one of two (or both) categories:

• Apprehensive: Someone who is apprehensive is likely to worry about money. This expresses itself with second-guessing financial decisions, having fear about unexpected finances, and constantly thinking about money – even if they have enough.
• Skeptical: Skeptical employees don’t expect things to work out financially. Because of the skepticism, they are unlikely to assume any risk, feeling that the investment is not likely to pan out.

Of course, some amount of loss aversion is beneficial when it comes to financial matters. Those in this category are less likely to be scammed and understand when something looks too good to be true. They are also likely to be more organized and understand exactly how much money they have and where they spend it.

On the other hand, if an employee fears loss, they are not likely to use their money to the greatest potential or have high financial stress.

Some actions for those with this bias might be to:

• Create a visual budget and project it out with best-case scenarios
• Create money goals in all areas of your life
• Work on concrete goals a little at a time

Although your employees likely have biases that negatively affect their financial health, providing them with the tools to recognize those biases and overcome them will allow them to gain financial wellness.

Those who have taken the Your Money Personality assessment say that following the guidance provided has helped them reduce unnecessary spending, increase savings, pay more toward debt, and increase their retirement savings – all while decreasing their financial stress.

1 - https://www.morningstar.com/lp/impact-of-behavioral-biases

2 - https://thedecisionlab.com/biases/loss-aversion