The psychology of instant financial decisions.

January 2016

New research conducted by Barclays suggests that 61% of people make a decision about a financial offer in less than a second.  I suggested that to understand this, we need to consider the two systems of human thinking, System 1 and System 2, as described by the Nobel Laureate Daniel Kahneman.  System 1 is the very quick, automatic, intuitive system, often emotionally charged, and prone to error; System 2 is slower, more conscious and reflective and less prone to error.  We rely a great deal on System 1 in everyday life, and make many decisions without slower, conscious thought.   It seems that we also do this when presented with financial offers that could actually be beneficial to us.  The majority of people make an instant decision, without even considering the pros and cons of the offer.  Our responses are typical automatic System 1 responses, here guided by negative emotion - primarily fear of hidden catches.   If people took a few extra seconds to make a decision, it would allow the more rational System 2 to play a role.  Kahneman has described System 1 as a bit of a 'workaholic' and System 2 as quite lazy.  This characterisation even seems to apply to issues to do with financial decision making.