It’s official. Savers respond better to positive scenarios around retirement than scare stories.

This is the conclusion of a study by Standard Life on how behavioural finance – the new buzz phrase in the financial services sector – has played a part in the public’s response to auto-enrolment, the government-backed pension saving scheme.

The report concluded that scaring people is not an effective way to get them saving. Messages of poverty in retirement are practically ineffective whereas painting a scenario where future retirees are comfortable and able to help their children was received more positively.

This may seem obvious but behavioural finance is becoming more important among the big players in the financial services space with increasing numbers of companies hiring ‘head doctors’ to look into how consumers save and invest and react to negativity.

We talk to Dr Lynda Shaw, psychologist, cognitive and business neuroscientist, about what behavioural finance is and how it may affect you:

What is behavioural finance?

Behavioural finance or behavioural economics is all about trying to understand the effects of social preferences, cognitive influences such as judgement biases and emotional factors when it comes to making financial decisions.

This can be about institutions and market trends, but part of my work focuses on economic decisions that individuals make and why they make them.

Do other professions use behavioural finance?

This is a topic that some industries have worked with for a while now.

For instance, the retail market frequently studies buying behaviours of their customers.

What is interesting is that the finance sector, legal profession and other traditionally ‘factual’ type businesses are now realising that people are not always motivated by information alone, they need to be engaged on an emotional and social level in order to help and encourage them to take positive action.

Why do consumers need to know about behavioural finance? 

When we understand what motivates us and how we can make a positive impact on our lives by taking just a few small steps, we feel in more control of our destiny. This is a powerful place to be.

For when we ignore our financial, or any, situation we become anxious because we know that hiding our head in the sand can make matters worse, especially if we don’t have a clue as to what’s going on.

Anxiety is highly stressful and can lead to depression. It’s far better to know what’s happening to our bank balance, savings and investments. We get such an amazing sense of satisfaction when we we’re in the black and can afford that night out, orbuz holiday or even something bigger. It has a great calming effect and helps people feel happier.

How do people react to negativity?

People take more notice of negative messages. This is logical because situations that are threatening or horrible may be dangerous, it’s all about the fight or flight response. However, just because we are immediately attentive to negative information doesn’t mean it will motivate us, because the brain very quickly works out if the threat is immediate. If it’s not, we can then ignore the intervention and go onto something else.

How do they react to positive communication?

If the communication is positive, it creates a desire, we want to feel good so we are more likely to seek out whatever is on offer. And if this is about financial security this can also lead to feelings of optimism about the future and research has shown that when we feel optimistic we are more likely to be attracted to reward type behaviour. This means that positive communication leads to positive action and can lead to an increasing upward spiral.

How can consumers use behavioural finance to improve their savings and investment decisions?

Even if someone is in debt and not able to save a penny, it’s still wise to find out how we can improve the situation by seeking out professional advice. I strongly recommend going to a reputable company or well respected independent financial adviser (IFA), it’s easy to check them out on the internet.

There are plenty of people out there who are not honourable and the last thing we want to do is get into further financial difficulty. That said, for those who are able to save and invest, they still need decent advice, so the same holds for them too.

I think a lot of people feel overwhelmed at the thought of seeking out financial advice and let’s face it many think the topic is pretty boring! We all know what it’s like to get a large envelope of financial information through the post that we haven’t even asked for and I guarantee most of it goes in the recycling bin. We need simple information to encourage small steps. Then as we get the hang of it and feel more confident, we can take it up a level.

Feeling in control of our lives is a delicious place to be. We feel physically and mentally healthier and a lot happier. Sorting out our finances can help with this.