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How behavioral finance can help improve financial wellness

When it comes to managing our personal finances, our decisions tend to be more emotional than rational. After all, we’re human, and our actions are often motivated by personal triggers and biases. We may succumb to “following the herd” by doing what others do even though it may not be right for our personal needs, goals and situations. Sometimes, acting on our instincts can lead us to make reactive decisions or miscalculations that can have costly consequences for our financial health.

So, we turn to behavioral finance—the application of insights from psychology to finance. This is the science that has been helping Bank of America understand and predict employee behavior to improve how we engage individuals in making better financial decisions.

A look at behavioral finance

Workplace Insights™ sat down with Bank of America’s Anil Suri, managing director, portfolio construction and investment analytics, and Jillian Verspyck, director, participant engagement programs, to dig into behavioral finance and how it can help shape employee financial wellness strategies.

One of the concepts of behavioral finance is how we perceive our present self often conflicts with our vision of our future self. This can affect our ability to take actions that will benefit us in the long run. —  Anil Suri, managing director, portfolio construction and investment analytics, Bank of America

“For example,” Suri says, “as someone on a diet considers eating a cheeseburger and fries, they may feel conflicted about the immediate gratification of indulging and the long‑term results of sticking to their diet.

“Let’s look at another example as it relates to employees and retirement planning,” Suri continues. “John gets a raise at work and is contemplating whether he wants to use the additional income to splurge on a 60‑inch smart television or contribute more to his 401(k). John can picture himself watching Sunday’s big game on his new TV, but it’s more difficult for him to see himself at age 70 enjoying his retirement because the outcome of investing in his 401(k) is unknown.”

An external influence or third party can often successfully intervene to resolve the conflict between present self and future self, according to Suri, helping to align goals and focus individuals on actions they can control.

“This concept of third‑party influencers supports the use of ‘nudges’ to guide employees to their best next step,” says Verspyck. “We are using this type of insights messaging to encourage behaviors that make sense for each individual. For example, if an employee repeatedly takes 401(k) loans, we might offer steps they can take to manage debt, establish a budget and create a savings strategy that can help reconcile their immediate need with their longer‑term needs for retirement.

“By understanding employees’ unique situations and personalizing the suggestions we offer, we can help them gain the skills necessary to make better financial decisions in all aspects of their lives,” Verspyck continues. “Our approach nurtures good financial habits by identifying specific actions that individuals can take, measuring progress and recognizing and reinforcing positive behaviors.”


Additional insights

Suri offers a sampling of other findings from behavioral finance:

  • How we feel about money and what we do with it are tied to our values and emotions.
  • We tend to be more sensitive to losses than similar gains.
  • How information is presented or framed can influence decisions.
  • The only way to get to long‑term goals is to tackle short‑term goals.
  • We respond well to nudges that help guide us to next steps.
  • If something worked, we are likely to repeat that behavior, even if that may not be in our best interest.
  • Make goals SMART—specific, measurable, achievable, realistic, time‑bound
  • Visualization is very powerful—if employees can break goals into steps and visualize themselves going through them, it can make goals feel more real and concrete and increase the likelihood that they’ll take action.

Key takeaways

Encourage employees to use the Financial Wellness Tracker (if available) to get a personalized action plan that can help them take incremental steps toward their short‑ and longer‑term goals.

Provide employee email addresses on payroll files so we can leverage email to appropriately “nudge” them with their best next step.

Read our whitepaper, Financial Wellness: Helping improve the financial lives of your employees, co‑authored by Suri.

Work with your Bank of America representative to use plan metrics to better understand employee behavior and potentially use those learnings to refine strategies to encourage better outcomes.