What is behavioural science?

We make thousands of decisions every day. Some are simple, and others are complex. Behavioural science blends a variety of different fields — such as psychology, neuroscience, and economics — to identify the conscious and subconscious drivers of your decisions.

Behavioural science explores all the things we know are influencing our behaviour – like money or peer pressure. It also explores the things we don’t realize are influencing our behaviour – like our environment or the way different options are presented. In many cases, the factors which influence our behaviour without us realizing can be extremely powerful.

Behavioural science is also the study of how to change behaviour. We all have goals in life, whether they be personal, professional, or financial, but we often struggle to do the things needed to accomplish our goals. Behavioural science can help people follow through on their intentions and execute the behaviours needed to reach their goals. To accomplish this, behavioural science uses tools, called nudges, to change peoples’ behaviour for the good.

Behavioural science can help improve your behaviour in many aspects of your life, whether it be your health, career, or relationships. It is also relevant to your finances, as financial decisions can be influenced by a wide range of factors.

Behavioural science is the science of understanding and changing human behaviour to help people achieve their goals.

How do you make decisions?

Leaders in behavioural science developed a simple model to explain how human behaviour functions. It is known as the Dual Process Theory. Here’s how it works:

Your brain is divided into two parts, or systems, which direct your behaviour. They are known as System 1 and System 2. They are two different modes of thinking that your brain uses when faced with different situations or contexts. While System 1 and System 2 do not actually exist in the brain, they help conceptualize how people behave.

System 1 is like a computer program running in the background as you go about your day. It generates automatic behaviours in response to many of the situations you face, without you having to think (e.g., tying your shoes). System 2 is like a light switch that is flicked on to turn on the lights. It is activated when System 1 cannot generate an automatic response to the situation at hand (e.g., playing chess).

However, neither system is perfect. They both make mistakes:

• System 1’s fast assessments of a situation can be influenced by limited information, your emotions, and intuition.
• System 2 is not perfect at recognizing and correcting the errors generated by System 1.

In behavioural science, these errors or mistakes are referred to as behavioural biases and heuristics (also known as mental shortcuts or rules of thumb). They cause you to make decisions that may not be  in your best interest.  

System 1 (fast, automatic, biased) and System 2 (deliberate, logical, slow) are two modes of thinking which determine your behaviour in response to situations or contexts.

What are behavioural biases?

Behavioural biases are flaws or blind spots in your thinking which lead you to make suboptimal decisions. They can influence your behaviour without you knowing. There are two types of behavioural biases: cognitive and emotional.

Cognitive biases are errors in the way people process information and facts. Three of the most common cognitive biases are:  

1. Confirmation bias – People search for, favor, or interpret information that confirms their existing beliefs, while also dismissing information that challenges those beliefs. For example, social media algorithms increase user engagement by showing people content they agree with.
2. Present bias – A tendency to prefer immediate rewards over future rewards, even when the future reward is more valuable. For example, when people cheat on their diet, they choose the smaller immediate reward (i.e., cookies) over the larger future reward (i.e., physical health).
3. Information or choice overload – When faced with too much information or too many choices, people ‘freeze’ and either avoid making a decision or choose the option they are most familiar with. For example, restaurant menus with too many entrées can lead people to choose whatever they ordered last time.

Emotional biases occur when people let their feelings influence their behaviour, rather than relying on facts. Three of the most common emotional biases are:

1. Loss aversion – The psychological pain of losing something is twice as powerful as the pleasure of gaining it. For example, if you talk to a group of competitors, such as athletes, many will say they hate losing more than they love winning.
2. Overconfidence bias – People are excessively confident in their own abilities, even when there are clear limitations of their abilities. For example, research shows that 80% of drivers consider themselves to be above average at driving, even though only 50% can truly be above average.
3. Herd effect (herding) – We have a strong desire to match our behaviour to those around us, even if it is not in our best interest. For example, many investors followed the herd and bought meme stocks in 2020, only to lose a lot of money.

Behavioural heuristics are mental shortcuts, or rules of thumb, that influence your decision-making without you realizing. People rely on these mental shortcuts instead of using all of the information available. Three of the most common heuristics are:

1. Anchoring effect – People rely too heavily on the first piece of information they are offered about a situation, topic, or decision. For example, clothing stores use discounts to make you feel like you are saving money, because you are anchored to the original price of the item.
2. Availability heuristic – When assessing how common an event or situation is, people rely on immediate and vivid examples they can easily recall. For example, people who read about crime in the news tend to believe that the crime rate is rising in their city, even when it is declining.  
3. Representativeness heuristic – When estimating the likelihood of something occurring, people base it on the frequency of similar events. For example, voters may be reluctant to vote for a young person for mayor because they do not fit the image of (or ‘represent’) past mayors.

Behavioural biases and heuristics are beliefs or shortcuts which cause you to make flawed decisions without you realizing.

How can you change your behaviour?

Behavioural scientists conduct research and use tools to understand why people behave the way that they do. They propose solutions to help people change their behaviour in order to accomplish their goals. Behavioural scientists are able to test the effectiveness of these tools in different contexts. They run experiments to identify whether proposed solutions are effective at changing peoples’ behaviour in beneficial ways.

One of the most popular tools behavioural scientists use are called nudges. Nudges are any adjustments to a person’s environment that cause them to change their behaviour. For example, a well-placed sign in a park encouraging people to protect the environment might nudge you to dispose of your garbage instead of littering.

Nudges and your financial behaviour

Nudges have been instrumental in shaping policies around the world. They have been used to help people improve their health, access better education, and live happier lives. They are also extremely valuable in helping you improve your financial behaviour.

For example, consider your retirement. Most working adults are not saving enough money for retirement. Behavioural scientists attribute much of this to present bias – people prefer to spend money today instead of saving for the future. In response, behavioural scientists have developed a variety of nudges to help people save for retirement. For example, automatically enrolling company employees in a retirement savings plan — rather than requiring them to enroll themselves — was one of the most effective nudges. It has drastically increased the amount of money people save for retirement, setting them up for a better future.

Whether it be in the areas of finance, education or health, nudges are very powerful.

Behavioural scientists use tools, called nudges, which alter the environment in which people make decisions — resulting in positive behaviour change.

Why is behavioural science important for your finances?

Behavioural science shows us that our decision-making is not always aligned to our goals. This is especially true when it comes to money. Your financial decisions are influenced by your emotions, environment and biases.

Behavioural science is especially relevant to your finances because financial decisions tend to:

• Be complex.
• Contain lots of information.
• Involve tradeTrade The process where one person or party buys an investment from another.+ read full definition-offs between present and future.
• Trigger emotions.

To get a better picture of this, consider the decision to start investing:

• Investing your money might mean opening a TFSATFSA See Tax-Free Savings Account.+ read full definition, automating contributions to your account, and understanding taxTax A fee the government charges on income, property, and sales. The money goes to finance…+ read full definition laws associated with different investments — it’s complex.

• To get started with investing, you might need to explore different investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition assets, advisors, and information sources – there’s a lot of information.

• Perhaps the hardest part of investing is actually moving your money from your spending account to your investment account. This requires you to forego spending today for the sake of your future financial wellbeing – there’s a trade-off between present and future.

• Finally, new investors will experience the highs and lows of the stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or…+ read full definition, the pain of losses in their portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and…+ read full definition, and the fear of missing out on the latest crypto assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment,…+ read full definition — this can trigger emotions.

Your financial decisions are influenced by many factors. These decisions can be high stakes, and mistakes can be costly. Behavioural science helps you understand the flaws in your behaviour and offers tips for overcoming these flaws to optimize your financial wellbeing.

Behavioural science can help you understand the flaws in your financial behaviour and empower you to make better decisions to improve your financial wellbeing.