Chapter 12: Defining and influencing financial capability

Question 1

What is financial capability?

Answer 1

Financial capability assumes that giving people skills is everything required for them to become financial capable

Question 2

What are conditions for capability? (4)

Answer 2

(1) Person needs enough knowledge and skills
(2) Conscious or unconscious desire
(3) optimal physical conditions
Favorable cultural institutions

Question 3

What are the 3 components of behavioral capability?

Answer 3

(1) Abilities
(2) Motivations
(3) Opportunies

Question 4

What are 2 different types of ability in behavioral capability?

Answer 4

(1) Pscyholgoical –> have knowledge and skills, but also comprehension and reasoning (ability to perform)
(2) Physical = health.

Question 5

What are 2 different forms of motivations in behavioral capability?

Answer 5

(1) Reflective motivations (system 2) = reflective, controlled and slow. Goal setting and planning, pros/cons
(2) Automatic motivations (system 1) = automatic, quick and affective. Habits, impulses, heuristics and biases

Question 6

What are 2 different types of opportunities in behavioral capability?

Answer 6

(1) Social opportunity = shared values and practices, do you come into contact with topic X in your direct surroundings?
(2) Physical = infrastructure or tech available for people including the disabled

Question 7

We are heavily influenced in automated motivations and behavior. What acronym is used to describe this and what does it stand for?

Answer 7

MINDSPACE

(1) Messenger = who
(2) Incentives = responses shaped by loss aversion, temporal discounting and mental accounts
(3) Norms = we like to comply with norm
(4) Defaults = we like go with the flow, requires 0 effort
(5) Salience = what’s new and relevant and/or simple
(6) Priming = sounds, lights smells whatever
(7) Affect = strong influence
(8) Commitments = consistent with promise
(8) Ego = make us feel better

Question 8

Ways to influence financial capability: psychological abilities examples

Answer 8

• Improvement through education
• Farmers in india; interactive expelenactions lead to double uptake of insurance
• Saving rates increase with help of employer-based education
• People underestimate how much wealth they will accumulate by saving at a certain rate, helping them to understand this more with visuals

Question 9

How can somebody use reflective motivation to influence financial capability? (6)

Answer 9

(1) Evaluation/goal setting phase;
- Identify an important whish that is director awards behavior change
- Identify and imagine the most positive outcome of the behavior change
- Identify the most critical obstacle that hinders fulfillment
(2) Planning / implementation phase
- Use implementation cues: if this happens than I do so
- Include details about when, where and how you want to act
- Include anticipating planning and coping planning

Question 10

How can you influence financial capability by influencing automatic motivation? (MINDSPACE!)

Answer 10

Messenger = Influenced by friends/family by telling what benefits of acting are
Incentives = people are less likely to spend tax repayments in the form of rebate or lump sum. If framed as bonus and it is cut into chunks they spend it (per-day frame is always preferred)
Norms = towel hotel example
Defaults = donor example and status quo bias
Salience = can cause focus on consumption or risk/reward
Priming = plastic-card/money effect
Affect = an attractive face to a solicitation increases the likelihood of borrowing as much as reducing interest rate
Commitments = asking for small initial commitment significantly reduces subsequent no-show
Ego = fill-in clarifying statement on top of a form leads to more finished reports due to given commitment