How Tech Can Help With 3 Behavioral Finance Biases

Sun, Nov 22, 8:04 AM ET, by , BlackRock

Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances, as psychologistÂDaniel KahnemanÂpoints out in his bestselling book â€œThinking, Fast and Slow.”

How come? When we make decisions fast, we rely on habit and intuition, forms of thinking that are difficult to change or manipulate, Kahneman argues.

But the good news is that while formal education and training may not change how people think intuitively, technology can help lessen the negative impact of common decision-making mistakes on personal finance outcomes. Here’s a non-comprehensive look at how technology is now tackling three behavioral finance biases that can contribute to poor decisions.

Financial Bias 1: Salience

SalienceÂrefers to how noticeable an event or information is. According to behavioral finance research, people tend to act on easily recalled and colorful information and ignore data that are less readily available for mental processing (think â€œout of sight, out of mind”).

A number of budgeting apps aim to help users address this bias by collating debt, bills and spending information in an easily accessible interface. The idea is that having all of this information readily available can make it easier for people to be proactive about their finances.

For example, I like howÂMint BillsÂaims to help users stay on top of their bills by sending reminders when bills are due, letting users pay bills immediately or via scheduled future payments. Meanwhile,ÂLevel MoneyÂtells users how much they can spend on a given day, once they have connected their bank accounts and entered their income, bills and desired savings.

Financial Bias 2: Present Bias and Procrastination

TheÂpresent biasÂrefers to the tendency to overweight rewards today and underweight pain and losses in the future, leading people to make choices about the future that their future selves would probably prefer not to be making. In other words, the present bias often leads people to push strenuous or boring activities into the future, i.e. to procrastinate. It applies to many areas of life, from eating and living healthily (think buying a gym membership but hardly using it) to saving and investing. For instance, many people realize that they should save for retirement, but they prefer to start saving tomorrow or next month.

Many goal setting apps aim to address this bias by helping users stay on track with their goals via frequent reminders, penalties, peer pressure and game-like features.

For example,ÂstickK,Âdeveloped by Yale behavioral economists, penalizes users for not reaching goals by donating their money, depending on the chosen settings, to a charity, to friends or to an organization the user opposes. Users can also make their goals public and invite friends to serve as supporters for encouragement, peer pressure and added accountability. Elsewhere,ÂCoach.me, another goal setting and tracking app that uses social community for motivation, offers paid personal coaches across a range of personal finance goals.

Financial Bias 3: Loss Aversion

Loss aversionÂrefers to people’s tendency to feel the pain from losses much more acutely than the joy from similar-sized gains. Loss aversion is often cited as one of the main reasons people have trouble saving for the future.

Some savings apps aim to encourage saving through having users set up explicit goals or automatic savings triggers. Others boost savings behind the scenes by rounding up purchases or by quietly siphoning money into a savings account when past spending patterns indicate that it’s not needed. The technology helps address both procrastination related to saving, and to the extent saving takes place automatically behind the scenes, loss aversion.

For example,ÂAcornsÂrounds up users’ everyday transactions and invests the change into a diversified portfolio. Elsewhere,ÂQapitalÂallows users to save with rules or triggers, eliminating willpower. Users can charge themselves for guilty pleasures with a â€œfine”; challenge themselves to underspend their budget and save the differential; round up purchases and save the change; or autosave a set amount daily, weekly or monthly. Alternatively, users can have savings triggered by anything from rainy weather to meeting their exercise goals, and they can post savings goals on social media for peer support.

To be sure, some of these app features have been around a long time in other forms; many employers, for instance, have long offered employees the option of automatic withdrawals from paychecks directly into 401(k) accounts. Also, at least for now, some of these technologies may be most helpful for achieving smaller, near-term savings goals.

In addition, these kinds of offerings and services often don’t come for free, and if they are advertised as free, users should make sure they’re aware of how the firm plans to use their personal data. Finally, while financial advisors can generally still offer more holistic and customized advice, these apps can help you stay on track day-to-day and avoid succumbing to behavioral biases.

Nelli Oster, PhD, is a Global Investment Strategist for the BlackRock Investment Institute. She writes about behavioral finance forÂThe Blog.

The opinions expressed in this reprint are intended to provide insight or education and are not intended as individual investment advice. We do not represent that this information is accurate and complete, and it should not be relied upon as such.Â Â©2015 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. iS-17145

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