In recent years, Greenwald & Associates has done a great deal of work on the connection between psychology and finances. We have explored the impact that emotions, personality, and behavioral tendencies have on the decisions that consumers make regarding their finances. These issues are important because psychological factors can have a big impact on financial success. For example, having a well-diversified portfolio is a great strategy as long as the owner does not panic sell when the portfolio is down.
One area we have begun to explore more recently is the relationship between emotional health and financial health, and in particular the relationship between stress and finances. This relationship is important for a couple of reasons. We all know that stress is a part of life in the modern world. Stress can be caused by terrorism or family strain, but how much of it is caused by money? This is important to know because the more that money is a major component of stress, the greater a stake financial companies can claim in selling peace of mind. Also, stress tends to have a component of irrationality to it. If we can better identify this irrationality, then we can encourage consumers to take more financially and emotionally healthy actions.
Recently, John Hancock Financial Services asked Greenwald to conduct a study for public release on the money/stress connection that revealed some interesting findings. Data not only confirmed the prevalence of stress, but that money played a significant role in this stress. In fact, over six in ten Americans report that they had experienced some type of psychological or physical stress symptom driven by money in the last six months.
When psychologists talk about stress, they often refer to the “fight or flight” response. In the financial world, “flight” is too often the response to financial stress. The Hancock research suggests that most feel they could reduce their stress by taking action, such as saving money or paying off debt, while others say they could do so simply by setting financial goals. Yet only a minority of people initiate actions that would reduce stress, such as establishing a budget or getting a financial plan. What’s more, stress is more likely to be driven by concerns about long-term goals than from meeting short-term needs – in other words, the type of challenges financial planning is meant to solve.
These findings suggest that financial companies have a greater opportunity than they may think to change consumer behavior by focusing not only on the financial health of the consumer but on their psychological health as well. Consumers need to better grasp that financial action can be a form of therapy.
We know that consumers often ignore promotions from financial companies, but research suggests that there may be a greater hidden desire for this support than we may think. In fact, in a publicly released study we did for American Century, most plan participants said that they either wanted a “strong nudge” or a “kick in the pants” from their employers to better prepare for retirement. Yet when asked the same question, plan sponsors underestimated how much cajoling these participants actually wanted.
We also often underestimate the need that consumers have for financial support due to the steady trend toward remote advice. In this online world, consumers are increasingly becoming do-it-yourselfers. The Hancock research suggests that half of consumers rely on their own personal research – through financial companies’ websites, financial planning websites, and self-help blogs – to guide their financial decisions. Yet the study also suggests that while personal research can be helpful, it may not be enough. While consumers do not necessarily recognize the value of overt financial education, it is increasingly clear that the majority would benefit from it.
The value of this research is that it suggests that we can do more to identify the triggers that will encourage consumers to take action. We are often taught that “money cannot buy happiness,” but clearly a rational approach to money management can go a long way to reducing stress and clearing a path in this direction.