How behavioral finance can help improve financial wellness

When it comes to managing our own finances, we tend to make more emotional decisions 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 help improve how we engage individuals in making better financial decisions.

The following examples help illustrate some of the concepts of behavioral finance and how we can apply them to help engage employees, overcome barriers and encourage positive actions.

Behavioral finance concept

Near term is more immediate and concrete and tends to take financial precedence; whereas something that is distant or far off feels abstract and more difficult to focus on and attain.

Opportunity

We’re educating your employees about how contributing even small amounts to their retirement account today can add up over time to benefit them in the future. We explain the power of compounding using simple examples to illustrate how much more they could have for retirement if they start saving earlier vs. later.

Behavioral finance concept

We often focus on immediate gratification at the expense of future rewards. For example, which would you rather have—$20 today or $40 a year from now?

Opportunity

We’re encouraging employees to visualize their future self and the life they want to have in retirement. Tools and guidance help them develop a step-by-step action plan so their goals feel attainable.

Behavioral finance concept

When it comes to processing decisions, behavioral finance defines two groups: “System 1” relates to fast thinkers who require little effort in making a choice. “System 2” relates to slower and deliberate thinkers who can be easily overwhelmed and have difficulty making a choice.

Opportunity

Use simple and clear language when communicating to employees about their benefits or providing financial wellness education. We’re focused on keeping communications short and direct. Direct links make it as easy as possible for employees to take action and remove any potential barriers that could hamper them. As a plan sponsor, consider plan design, such as implementing auto programs to help overcome employee inertia when it comes to retirement plan participation and contributions.

Key takeaways

Ensure your internal communications have specific and clear calls to action that are relevant to the recipient’s needs.
Encourage employees to use the Financial Wellness Tracker, if available in your plan, for a financial health assessment and step-by-step action plan to help improve their wellness.
Talk with your Bank of America representative about adopting our automated enrollment reminder campaign for your eligible non-participating employees.