Low engagement in personal finance: values help predict who makes the right decisions

Interview with Susan Thorp (University of Sydney)

The ability to absorb financial shocks is crucial to financial well-being. However, decisiveness and engagement are generally low when it comes to financial decisions. “Financial shocks often come with illness or unemployment,” explains Australian researcher Susan Thorp (University of Sydney). “Unpleasant subjects to think about. Indecision however can cost individuals and society a lot of money. Therefore, we created a model that maps out typical steps in decision-making and link this to various possible predictors of choice behavior. We found that especially personal values ​​and financial literacy can predict the extent to which people are able and willing to make a (better) decision.”

Photo: Robert Goddyn

“In an average 40-year work life, there is a good chance of having to deal with the financial consequences of unfortunate life events such as unemployment, disability or death,” says Susan Thorp. “Unfortunately, engagement is low; 80% of people never think about their life insurance or its coverage. This involves great risks, since the typical life insurance only covers 37% of median families’ needs. In Australia, the costs for the government of filling the gap left by under-insurance could go up to one billion dollars p.a. With our research, we test the importance of financial literacy and personal values to the stages of insurance choice.”

Values

To get a better grip on the decision process, Susan and her co-authors mapped out a consumer funnel that shows different degrees of interest that can lead to people making decisions about their life insurance. The research shows that personal characteristics such as your values, family composition, financial situation, bequest motive and having a job play a role in predicting a well-informed, active decision. “We used the Schwartz Model of basic human values as a base and then we aggregated these values to four higher contrasting orders: Self-Transcendence, Self-Enhancement, Openness to change and Conservation. With these, we can estimate the quantity of people who are likely to make a well-informed decision, and the ones that are not.”

Communication
“Shockingly, our research shows that 28% of people say they don’t know what life insurance is and what it covers. There is a lot to win if we work on better financial literacy. Also, in order to address people based on their personal values, you should adjust the one size fits all model that is widely used in financial communication. Our model helps to predict to a significant extent what part of the customer journey people are in and to what extent they are able to make the right decision for them. These insights can help to better structure the communication flow and help people who are in need for some guidance towards a financially healthier situation.”

Read more
Read the working paper Life Insurance: Decision States, Financial Literacy, and the Role of Personal Values, by Hazel Bateman (UNSW Sydney), Paul Gerrans (University of Western Australia), Susan Thorp and Yunbo Zeng (University of Sydney) or view Susan’s presentation on the Netspar International Pension Workshop.

Interview series
This interview with Susan Thorp is part of a series of interviews Netspar conducted with international researchers during the 2020 IPW. These provide a glimpse into the findings from Netspar’s ongoing global academic research. Over the next few weeks, we will be publishing an interview every Friday around noon CET on our website and through social media.