What distinguishes economics from the other sciences is its willingness to constantly expand its boundaries to encompass insight originating from other fields.

One such example is the increasing focus that economists are devoting to psychology. At the highest level this has been acknowledged through the award of the Nobel Prize in economics in 2002 to Daniel Kahneman “for having integrated insights from psychological research into economic science, especially concerning human judgement and decision-making under uncertainty”. Such research has in the meantime continued to expand and has now reached a point where ideas can be applied to the benefit of society.

This is precisely the philosophy underpinning the latest World Development Report 2015, titled ‘Mind: society and behaviour’, which has just been published by the World Bank to provide a framework to help governments apply these insights to develop sound policies. Of particular relevance are the recommendations dealing with the financial sector and financial decisions.

One often comes across anecdotes which confirm the very uneven playing field between the providers of financial services and their clients, ultimately resulting in bad financial decisions. How can clients be sure that they are buying the financial products which they need or are best suited for them? Likewise, lack of financial knowledge results in a situation where people are unware of financial products which could be very useful for their specific circumstances.

European legislation has contributed to significantly improve the level of consumer protection. Likewise, the more innovative financial institutions have sought to expand the range of services and products on offer beyond the traditional medieval range. However, fresh insights from psychology can be useful to supplement the existing legislation and financial practice, while at the same time, expand the usage of financial products which abroad form part of the daily lexicon but in Malta they are still restricted to the elite.

The report quotes evidence to show that “habits and preferences formed in early life tend to stay with people into adulthood and can have profound effects”. Indeed the report is suggesting that students should be more exposed to financial education and given the opportunity to repeatedly practice financial decision making (such as price comparison, keeping track of expenses, choosing payment methods, etc). This strategy would result in improved financial behaviour at a later stage.

Another interesting study quoted in the report shows that local television programmes can have a positive impact on financial decisions if, say, the main characters in a soap opera convey examples and messages of sound financial management. The number of local media productions in Malta has increased significantly but so far, in the main, financial behaviour seems to be completely absent from the plots.

How can clients be sure that they are buying the financial products which they need?

Another study quoted in the report shows that when borrowers were given information on the monetary value cost of their borrowing, rather than just the interest rate, the amount of borrowing declined as borrowers realised better the financial implications of their behaviour.

The report also provides useful unconventional ways to bring about desirable outcomes such as higher saving, for example, by means of timely text messages to emphasise saving for a specific goal, e.g. to purchase a consumer durable.

Another method which seems to work, based on the result of a specific experiment that was carried out, is to artificially partition workers’ salary in two different accounts, one labelled ‘for consumption’ and the other for ‘saving’ purposes.

Indeed the study reports that “although there was no binding restriction on spending… this simple manipulation led to an improvement in saving”.

The tendency for people to compartmentalise funds into mental categories, however, also has its downside as this often results in simultaneously having low-interest savings while, at the same time, borrowing at much higher rates.

Another strand of the literature shows that people may shy away from investment opportunities that are profitable over time but that might expose them to loss at any given time, as a result of strong loss aversion and myopic focus. This results in a situation where people invest too little in ‘risky assets’, resulting in low returns for a long period. This is clearly manifest in Malta where there still remains strong bias in terms of bank deposits vis-à-vis other types of financial products such as bonds and shares.

In order to circumvent this bias, financial institutions need to be more active in passing on the message of the importance of wise portfolio management, while ensuring that any mistakes and ethical/regulatory breaches which may have occurred in the past are not repeated. There is need for a more dogmatic compliance approach in this respect.

Research shows that people are more likely to pay attention to financial education if it is targeted to their needs, rather than provided in general terms. Funds should be allocated to designing nation-wide initiatives aimed at increasing financial knowledge such as through face-to-face mentoring, using possibly the local councils’ and NGO’s infrastructure as platforms.

Recent economic growth figures and the economic outlook suggest that the country’s development process is set to continue in the coming years. There is, however, an urgent need for the level of financial expertise to be likewise upgraded to reach a level commensurate with the country’s higher standard of living aspirations.