Checking your intentions with your actual financial behavior

Checking your intentions with your actual financial behavior
14 April 2013

At cashy we focus on helping people with financial empowerment. Financial empowerment extends beyond financial literacy, which often understates the role of psychological barriers to establishing sound financial behaviors, whereas financial empowerment incorporates the crucial element of attitude (beliefs) and behavior.

Evidence from cognitive science and behavioral economics suggests that intentions do not necessarily result in the intended behavioral outcomes. There are various human biases and psychological barriers that can prevent an individual from engaging in positive behaviors, such as eating healthy, exercising, or saving regularly, even when they have the ability, desire, and opportunity to do so.

Flaws in our thinking

To understand the gap between our intentions and actions it is good to consider the two systems of thinking, which I wrote about here. Guiding our thought processes and decisions these two systems are the automatic and the reflective. The automatic system is characterized by intuitive actions that are effortless, uncontrolled, and fast. The reflective system is associated with conscious thought, drawing on memory, rules, and representative examples to help form decisions. However, the mental shortcuts of the automatic system are sometimes flawed, resulting in psychological biases. Three psychological biases, which are a common way of processing automatic thoughts (i.e. System 1 thinking) in particular stand in the way of making rational financial decisions: availability bias, status quo bias, and hyperbolic discounting.

Psychologists have said that under the availability heuristic humans are not reliable because they assess probabilities by giving more weight to current or easily recalled information instead of processing all relevant information. We use too much of the information available today and fail to consider potential situations in the future (loss of job, divorce, serious illness, etc.)

Status quo bias is sticking with the current situation, even when it is no longer the most optimal choice; this is especially relevant with insurance policies, investments and retirement funds.

Hyperbolic discounting bias, as psychologists have shown, is when individuals are biased toward “smaller-sooner” rewards over “larger-later” rewards. The challenge, in part, is developing mechanisms to delay immediate gratification for future, larger-later rewards.

In addition to the obvious financial benefits of overcoming these biases, sound financial management behaviors have both personal and interpersonal consequences. Poor financial decisions are directly related to anxiety and stress. Debts and negative financial behaviors are also highly associated with relationship problems. However, positive financial management behaviors are associated with physical health, mental health, academic success, and life satisfaction.

Good financial behaviors are predicted upon overcoming our biases and taking a proactive, mindful effort into managing and maintaining our finances. The following behavioral finance checklist can serve as a welcome assessment to regularly track your financial life for better outcomes.

How often you have engaged in the following activities in the past six months:

1 = never, 2 = seldom, 3 = sometimes, 4 = often, 5 = always

1. Comparison shopped when purchasing a product or service

2. Paid all your bills on time

3. Kept a written or electronic record of your monthly expenses

4. Stayed within your budget or spending plan

5. Paid off credit card balance in full each month

6. Maxed out the limit on one or more credit cards

7. Made only minimum payments on a loan

8. Began or maintained an emergency savings fund

9. Saved money from every salary

10. Saved for a long-term goal such as a car, education, home, etc.

11. Contributed money to a retirement account

12. Bought bonds, stocks, or mutual funds


Please rate your behavior regarding insurance within the past year on a scale of 1 – 5:

1 = Never, 2 = seldom, 3 = sometimes, 4 = often, 5 = always.

13. Maintained or purchased an adequate health insurance policy

14. Maintained or purchased adequate property insurance like car or homeowners insurance

15. Maintained or purchased adequate life insurance

How did you rate? Do you feel knowledge of your financial decision biases will help improve your financial behavior?


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Head of Behavioral Finance
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