Mental models differ from social norms. People use mental models to make sense of the world around them. They ‘capture broad ideas about how the world works and one’s place in it‘. While social norms focus on what behaviours need to be reinforced for members to fit into a social group, mental models provide the way people categorise, stereotype, identify, consider causal relationships and explain to themselves the way the world works. They may have been originally informed by social context, but they can exist independently of social interactions.
Some mental models may be innate (why we see events that happen more than three times successively as the emergence of a pattern) and others are idiosyncratic (evolved out of an individual’s or population’s historic experience). Mental models can exist at broad societal levels or at very specific, even individualised levels.
Heuristics, for example, is an important subset of mental models that we use throughout financial planning. These rules of thumb invariably spark heated debate around which are old-school mental models and which are viable into the future.
Other mental models can be problematic because they may have served a purpose at one point in time that is no longer relevant. Think of gender or ethnic biases. Think of the legacies of apartheid on our mental models. In some cases, mental models may outlive their usefulness – or they may persist in spite of never being useful in the first place – but the harsh reality is that they are extremely persistent.
Creating an effective financial empowerment programme requires understanding which mental models we need to help individuals abandon and which mental models we need individuals to embrace, particularly if they help individuals navigate the complex world of money. We can actively change a person’s mental model, but to do so means that we have to be clear about the potential for impact such a change might have on other decisions an individual might make.
The World Bank study argues that we can test the influence of a mental model on a behaviour by experimentally manipulating the salience (its prominence or importance as an influence) of a mental model. What exactly do we mean? An example of how we can manipulate outcomes to student test scores is instructive. When students were asked to reveal whether they went to public or private primary schools before they took a test, there would be decided variations in test scores. When the same population revealed nothing about their backgrounds before the test, the variation in results was indistinguishable.
Let’s use another concrete example of how an understanding of mental models (and who in a given population possesses what kind of mental model) allowed a group of economic development specialists to formulate a savings programme that boosted savings an average of 82% once the appropriate candidate had been identified2.
The exercise that was conducted in the Philippines targeted commitment programmes – programmes that encourage people to commit to locking away their savings until they reach a predefined target to service a predetermined need (for example the education of a child). In spite of research that suggests that these programmes can be effective in getting people to save above and beyond what they would typically accumulate in a standard savings account (where they would be free to take their money when they wish), many financial institutions weren’t offering these devices for the simple reason that they couldn’t identify the appropriate market.
What the research team was able to establish was that a targeted series of questions could be used to help establish what kind of financial consumers would find these products attractive. The mental model that the team zeroed in on was what behavioural economists identify as ‘hyperbolic discounting’. This is just a complex way of saying that there appears to be a general tendency for people to be more focused on their immediate needs than on longer-term distant needs. But some individuals can be aware of this hazard and recognise that the value of a commitment programme is that it keeps you from falling into that trap.
In the Philippines, it turned out that one segment of the population scored particularly well on this account. These were, typically, married women – or, more specifically, married women who were held responsible for managing household accounts.
In all likelihood, there was as much a sociological reason as a psychological reason for why commitment devices were particularly attractive to this segment. Locking away funds until they reached a pre-specified target also meant that troublesome spouses couldn’t prematurely bully the women out of their hard-earned accumulated savings. Either way, a targeted consumer translated into a successful savings campaign.
From savings to investments
How could we apply a similar strategy to manipulating salience around investment strategies?
Goals-based investing is definitely one mental model we would like to see more investors adopt. There is an inherent logic in getting people to set out their personal financial goals and then helping them identify the investment strategies that have the highest probability of meeting that goal. Investment management as a professional enabler is far more capable of delivering on that promise to clients than it is capable of consistently winning the performance sweepstakes. But before this is likely to succeed, we need to address the current mental model that outperformance of the peer group or some benchmark is the most important criteria for success in investing.
To affect a mental model shift we would have to increase the ‘salience’ of goals-based solutions by:
After all is said and done, are we likely to attract all investors to a goals-based framework? The answer is most decidedly not everyone. But for a certain segment of investors, fiduciaries and advisers for example, goals-based investing represents a distinct improvement on the traditional returns-based strategies. That means we need to take a lesson from our Philippines commitment scheme example. By identifying which type of client would be most disposed to this particular mental model and by doing as much as possible to remove blockages for those kinds of clients, we stand a much better chance of success.
By identifying which type of client would be most disposed to this particular mental model and by doing as much as possible to remove blockages for those kinds of clients we stand a much better chance of success.
Self-help groups can have a significant impact on getting individuals to change their mental models, particularly their perceptions of themselves and their place in the world.
Media and role-modelling provide a powerful way of changing mental models.
Education and early childhood interventions can have long-term effects.
Cost/benefit projections and present value projections can change mental models around certain financial trade-offs.
Decreasing economic dependence can be an important way of changing an individual’s mental model.
Any time one wants to introduce a change or utilise an insight to improve outcomes, one has to dig down any number of layers of consideration to appreciate the potential knock-on effect – both intentional and potentially unintentional.
“Because of the interplay of these different dimensions the net effect is not an arithmetic or even geometric addition of complexity. Rather we need to think of it as logarithmic3.”
The complexity comes from the fact that each factor has variable interactions with each additional factor. If there is one lesson that the World Bank is trying to impart to their readers it is that any time one wants to introduce a change or utilise an insight to improve outcomes, one has to dig down any number of layers of consideration to appreciate the potential knock-on effect – both intentional and potentially unintentional. If there is one fault that development policies are often guilty of it is this failure to dig deep enough to understand both the true roots of a problem and to anticipate the potential knockon effects of the outcome.
But there is one further phenomenon that plays an important role in financial decision-making that the World Bank study doesn’t explicitly touch on. This is an individual’s mindset towards money. At some level, money mindset and mental models are interrelated. But the money mindset factor demands that we place a much stronger spotlight on the way an individual engages with money and whether it might be suboptimal or dysfunctional. This we deal with in our next section.
1 World Bank (2015)
2 Ashraf, Karlan & Wesley (2006)
3 World Bank (2015)