There is a multitude of factors influencing our behaviour with money. I believe that we can divide these into three sections; social, consumer and evolutionary psychology. All are intricately linked and we could probably investigate further areas too! For now, let’s look at the social psychology of spending.
This is the first of a three-part series looking into why it can be a struggle to save money and what we can do about it. This section will cover:
- How Social Norms Impact Your Ability To Save
- Cultural Procrastination With Saving Money
- How Language Can Influence Savings Rates
- How Small Nudges Can Help You Save
1. The People Around You Could Be Costing You Money
You might think that if you heard an advert of the news, saying something along the lines of “just 10% of people in the UK exercise for 10 minutes or more a day”, that you would be shocked and this would propel you into action.
The evidence points to the contrary and this is due to how social norms influence our behaviour. The more something is normalised by the people around you or the media. The more likely you are to engage in a certain behaviour, social smoking is another example of this.
With this in mind, we rarely hear people around us in the office chatting about how much they’ve saved this month. However, we do see the flurry of new purchases they made or the new convertible they’ve bought.
Reducing The Impact Of Social Norms
With this in mind, we need to be aware of what or who we watch on television, who we socialise with and what other people’s behaviours are. Surround yourself with 9 people who smoke, drink and gamble their money away and you are likely to become the 10th.
The power of social norms and influence is high. Even in experimental studies, people have been shown to give the obviously wrong answer when given the option to conform.
2. Why You Feel Apathetic When It Comes To Saving Money
Culturally speaking there is a sense of apathy when it comes to saving and retirement. The majority of people are approaching retirement without taking the time to think about retirement, despite their impending financial doom.
This got me thinking about whether other countries and cultures are the same? Not only this, but if there is a cultural influence, does this get passed down from generation to generation? The answer to both questions is yes, according to the London School Of Economics. They identified that:
“UK-born children and grandchildren of people born in countries with high savings rates such as China – tended to save at a higher rate. Likewise, the children and grandchildren from those countries with low-savings rates tended to save at a lower rate”.
3. How You Speak Can Reduce Your Savings Rate
Some time ago, I came across a Ted Talk by a behavioural economist called Keith Chen. The talk was called “Could your language affect your ability to save money”. The basic premise of this talk, is that a futured language would be grammatically different from a futureless languaged.
For example a futured language would say: “It rained yesterday”, “it is raining now”, or “it will rain tommorow”. By contrast, in chinese wthis would be “yesterday it rain”, “now it rain”, “tommorow it rain”. There is less division in the time spectrum and the English requires a lot more information in terms of the timing of events.
From his research on the language of economic behaviour he identified that futurless language speakers were:
- 30% more likely to have saved in any given year
- Retire with 25% more in savings.
- 20-24% less likely to smoke.
- 13-17% less likely to be obese.
- 21% more likely to use a condom.
This makes sense when you look at the wider literature, descendants of migrants in countries such as the UK continue to maintain a higher savings rate.
Am I Suggesting You Migrate or Learn a New Language?
Of course not, although this might not be such a bad thing. However, the language we use can influence our behaviour and consequently our ability to save money. This can be the difference between saving money and procrastination.
Therefore, we should attempt to adjust the way we think and speak. For example, try to replace “I will start saving soon”, “I am going to start a budget next month” with “I must save more money today” or “I must save more money this week.”
Break things down to a daily, weekly or monthly target. Thinking in years and decades is a dangerous game and you may find you never get round to it at all.
4. How To Nudge Your Savings In The Right Direction
Nudge theory is a concept in behavioural science that has had global implications. Two examples are health and retirement savings but look at organ donation. What do you think drives organ donation; is it culture, religion or how much you care about people?
Now consider the below graph. The countries on the left are ones where you have to tick a box to commit to organ donation. Therefore you have to make a decision.
The countries on the right are ones where the opt-in is automatic and no decision is required. Despite the similarity in culture and geography, say the United Kingdom and France, there is an 82.74% difference.
Johnson and Goldstein 2003
Retirement savings & Workplace Pension
According to the Office of National Statistics, since auto-enrollment started in 2012, there has a 29 percentage points increase in the proportion of UK employees enrolled in a workplace pension, from 47% in 2012 to 76% in 2018. With just 1 in 10 people making the conscious decision to opt-out. Just by nudging people’s default option, a significant amount of people are now saving money.
You might either be thinking, well this is fine, I’m already in a country where auto-enrolment is the default. Alternatively, you might be thinking, for the second time, well, I can’t just up and move countries.
Make A Choice To Take Action
Again, this is not what I’m suggesting. If you are auto-enrolled in a pension. Just take into consideration, upping your payments, as you are already in the scheme, you don’t have to think about if or how to invest your money.
By contrast, if you are not in an auto-enrolment country, just make a decision to invest. A simple Yes. Get your foot in the door, then start making small changes and decisions. The important thing is to realise that even the fact you have to make a decision, is a major decision.
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Final Thoughts On The Social Psychology Of Saving
The top-down influence of culture, language and governmental influences is undeniable. It’s important to consider that we can be both positive and negatively influenced by them.
Either through peer to peer interaction, social media and nudges. This is some very observable social psychology, impacting on how we save money. Subsequently, we should challenge the social norms around us.
With this in mind, I hope the above has given you some food for thought, in terms of why you do or do not struggle to save money. In many cases, you can forgive yourself. In others, this article has hopefully been a call for action!
If you have any thoughts on social psychology or money or how culture influences our ability to save money, please let me know in the comments section. Any other thoughts and comments are also very welcome.
Continue to the second part in this series and read about the consumer psychology of why we struggle to save money.
Great post. Pension auto-enrolment is one of the success stories of 21st century British public policy — though there aren’t that many to go after!
It’s always astounding, however, to see the sheer extent to which inertia drives financial decisions, even, for example, once invested in a company pension scheme. The vast majority will stick with a default fund, which may prove inferior to the alternatives at that point in life. Years and years of earlier retirement are lost due to status quo bias!
Thanks for your comment!
Yes it definitely is a success story. Like you say, there probably aren’t that many, so it would be good to see some additional nudges (e.g. higher default contributions).
Yes, I remember touching on the cost of staying in the default pension fund in a previous post. I believe the figure was a 3% a year cost in returns. That’s going to compound up to a serious amount.