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Are We Born to Spend?

When people routinely makes poor decisions regarding spending and borrowing money, should they blame their genetic background ("I inherited my mom's shopping gene"), or rather, fault the inadequate financial education they received at school? In other words, can their financial behavior be couched in terms of the classic "nature vs. nurture" argument?

According to Dr. Hersh Shefrin, Professor of Finance, Santa Clara University, the answer is, "it's complicated."

In his recently published Born to Spend? How Nature and Nurture Impact Spending and Borrowing Habits, commissioned by Chase Blueprint®, Dr. Shefrin argues, "Understanding what drives our financial behavior is important because we know that strong financial literacy and good spending and borrowing habits are closely linked."

He cites strong evidence that nature (i.e., genetics) impacts financial decision-making just as it does athletic ability and physical traits. At the same time, however, research shows that through smart nurturing (education), people can be encouraged to make better financial choices and tame their more irresponsible instincts.

Why traditional financial literacy approaches aren't working.

Dr. Shefrin posits that traditional financial education has been largely ineffective at increasing financial literacy. He cites results of the biennial Jump$tart Survey, a test administered to thousands of randomly selected 12th graders nationwide, which revealed that students who had taken a high school class aimed at improving financial literacy fared no better on the test than those who had not.

(Interestingly, students who said they regularly played the Securities Industry and Financial Markets Association's Stock Market Game, where they invest a hypothetical $100,000 in an online investment portfolio scenario, did show increased financial literacy scores . This underscores the importance of including fun, competitive games into the educational mix.)

He further asserts that most current financial education programs don't take into consideration the importance of psychology and the knowledge of how our brains make decisions. "The key to better financial literacy involves identifying what motivates us and then designing programs that help people develop and maintain strong spending and borrowing patterns," says Dr. Shefrin.

The study identifies several ways to improve financial literacy education, including:

  • Design smart, nurturing programs that motivate people to set goals, develop budgets, track expenses, identify ways to increase income, choose appropriate lenders, pay down credit card balances, and so on. For example, a program called Save More Tomorrow™ has proven extremely effective at helping employees save more money for retirement through their 401(k) plans.
  • Use modern technology (specifically personal financial management tools) to provide people with their spending data in a straightforward way that helps them acquire better habits. For example, personal financial management tools like Chase Blueprint or Mint.com help consumers recognize spending patterns and correct their bad behavior.
  • Turn finances into fun by using games to help instill better spending and borrowing habits in children and young adults. Research shows that challenging, interactive video games motivate students' competitive instincts and activate the reward centers of their brains more so than traditional classroom lectures and exercises. For example, Visa's Financial Soccer is a fast-paced, multiple-choice question game that tests players' knowledge of personal finance skills as they advance down field and try to score goals.

Existing efforts to promote sound financial decision-making, while well-intentioned, may not be keeping pace with what psychologists, economists and others know about how the human mind works. "Now is the time to use this knowledge for a collaborative approach across public and private sectors to instill mindful spending and borrowing habits in our classrooms and beyond," concludes Dr. Shefrin.

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