Do risky scenarios affect forecasts of savings and expenses?

Abstract

Many people do not possess the necessary savings to deal with unexpected financial events. People’s biases play a significant role in their ability to forecast future financial shocks: they are typically overoptimistic, present-oriented, and generally underestimate future expenses. The purpose of this study is to investigate how varying risk information influences people’s financial awareness, in order to reduce the chance of a financial downfall. Specifically, we contribute to the literature by exploring the concept of ‘nudging’ and its value for behavioural changes in personal financial management. While of great practical importance, the role of nudging in behavioural financial forecasting research is scarce. Additionally, the study steers away from the standard default choice architecture nudge, and adds originality by focusing on eliciting implementation intentions and pre-commitment strategies as types of nudges. Our experimental scenarios examined how people change their financial projections in response to nudges in the form of new information on relevant risks. Participants were asked to forecast future expenses and future savings. They then received information on potential events identified as high-risk, low-risk or no-risk. We investigated whether they adjusted their predictions in response to various risk scenarios or not and how such potential adjustments were affected by the information given. Our findings suggest that the provision of risk information alters financial forecasting behaviour. Notably, we found an adjustment effect even in the no-risk category, suggesting that governments and institutions concerned with financial behaviour can increase financial awareness merely by increasing salience about possible financial risks. Another practical implication relates to splitting savings into different categories, and by using different wordings: A financial advisory institution can help people in their financial behaviour by focusing on ‘targets’, and by encouraging (nudging) people to make breakdown forecasts rather than general ones.