In an age when financial security is increasingly becoming a dream, a groundbreaking study reveals that carefully designed behavioural prompts can greatly improve people’s saving decisions, specifically in retirement plans. The study, conducted through an incentivised laboratory experiment, aimed to identify whether tailored behavioural prompts could lead to wiser financial decisions among young adults.

The findings were published in the journal Financial Planning Review.

In the study, participants were engaged in 15 sessions where they allocated $100 of their earnings across four choices – two being risk-free (Do Not Invest and Conservative) and two involving the chances of gains or losses (Moderate Growth and High Growth). The decision-making was motivated by real monetary rewards given to randomly selected participants at the end of each session.

The four investment choices varied in terms of when the participants would receive the funds. The Do Not Invest choice allowed participants to receive their money in 1 week, whereas the other three investment options had a 26-week delay.

The experiment divided the participants into four treatment groups. The first group was the base case, where 49 participants made investment decisions without any guidance. The other three groups were given behavioural prompts:

• Goals prompt. 48 participants identified their investment goals before making investment decisions.
• Goals plus investment advice prompt. 72 participants identified their goals and received investment advice for achieving those goals.
• Future-self prompt. 54 participants reflected on their future financial needs within the next six months.

The study showed that while the aggregate expected returns from the investment portfolios did not vary significantly across treatments, the behavioural prompts had a meaningful impact on specific groups of participants.

Participants’ time preferences and risk attitudes were found to be extremely influential on expected returns. Those with higher discount rates and risk aversion earned significantly lower expected returns. Financial knowledge also played a role, with higher levels of financial literacy associated with higher expected returns.

Most interestingly, the behavioural prompts led to more thoughtful investment decisions, aligning more closely with participants’ goals and circumstances.

The outcomes of this study have far-reaching implications for retirement plans and the financial wellbeing of individuals. By incorporating behavioural prompts in retirement planning, individuals can be nudged into making decisions that align more closely with their long-term goals.

For instance, by encouraging individuals to think about their future selves, they may be more likely to opt for investments that offer higher returns in the long run. Similarly, setting specific goals and receiving tailored investment advice can empower individuals to make investment choices that best serve their future needs.

As financial uncertainties continue to loom, this study sheds light on how simple behavioural prompts can be a game-changer in improving financial decisions. Retirement plans and investment platforms can leverage these findings to design systems that encourage smarter investment choices, ultimately contributing to a more financially secure future for individuals.