7 takeaways on Behavioural Economics, Psychometrics and Nudging

By Rodrigo Rocha

Psychology and behavioural sciences can help us understand the role our character and personality play in our decision-making processes, especially the choices that impact our financial lives. Understanding the importance of character has been shown to lead to better outcomes in the field of credit and collection for both consumers and financial services providers. 

Here are 7 takeaways from the “Behavioural Economics, Psychometrics and Nudging” roundtable at the Ciclo de Riesgo event in Colombia. 

1. People don’t always make rational decisions and that’s part of being human. Our choices are often influenced by our character, personality and lived experiences. Character traits have shown a direct relationship with behavioural outcomes.
   
   
2. Behavioural economics has long been studied to identify ‘willingness to pay traits’ with a view to use them for a marketing or consumer angle, but similar principles apply on ‘willingness to repay traits’ and this can be applied to improve credit outcomes.

    

3. Psychometrics sounds new, but it has been around for a long time, and is used frequently in industries such as recruitment, selection of members of government agencies and public forces, definition of public health policies, guidance in selection of studies and professional career, among other uses.

   Psychometrics essentially it refers to the ability to measure psychological traits. Psychometric assessments can objectively measure and quantify variables such as abilities, skills, knowledge, attitudes or personality traits.

4. Focusing on the right traits is integral to building predictive analytics tools. Personality traits and behavioural characteristics that can help better predict risk include Conscientiousness, Risk Aversion, Honesty, Ambition and Fluid Intelligence among others.  
5. Mental accounting is one example of a natural control system of the brain that people employ to put barriers to temptation. It refers to the tendency of individuals to treat money differently based on how it is designated or labelled in their minds. Mental accounting can also influence how people perceive the value of money, and how they prioritize different financial goals. For example, someone who is saving up for a big-ticket item like a car or a house may be more motivated to save when they have designated that money for that specific purpose, rather than simply trying to save more in general.

    

6. Nudging’ and choice architecture are concepts in behavioural economics that aim to influence people’s decisions by altering the context in which choices are made. Nudging involves making subtle changes to the environment or presentation of options to encourage a particular behaviour or choice, while choice architecture refers to the design of the choice environment to make certain options more appealing or prominent. Overall, these concepts are aimed at promoting better decision-making by taking advantage of human biases and heuristics, while still allowing individuals to make choices that align with their preferences and values.

   While nudging is intended to encourage positive behaviour or choices by making them easier or more attractive, ‘Sludging’ involves intentionally creating barriers or obstacles to discourage or impede certain behaviours or choices. For example, setting the default selection for the user to obtain the highest rate of insurance that they do not need, or making it unnecessarily difficult to cancel a subscription service.

7. What impact does our cultural, geographical, and socioeconomic background have on our personality?  Overall, our background and experiences can shape our personality in complex ways, influencing our attitudes, behaviours, and self-concept. While these factors do not necessarily determine our personality traits or outcomes, they can play an important role in shaping our development and shaping our interactions with the world around us.

    

   However, people of the same background can also have vastly different personalities, for example, siblings or members of the same family may grow in the same geographical, cultural, and socio-economic environment but often make very different decisions and have very different personalities as well. All of this can be captured in a psychometric assessment and provide insights into credit risk.