• Jeroen van Winden

Closing the gap between behavioural finance and personal finance

Understanding consumers’ financial decisions is becoming increasingly relevant. A big opportunity lies in closing the gap between behavioural finance and personal finance.

Behavioural finance traditionally studies the way in which psychological factors affect the financial decision-making of investors. However, its concepts are becoming increasingly applicable to the financial behaviour of the ‘everyday’ consumer. As consumers are managing all aspects of personal finance in an increasingly individualistic way, taking into account behavioural aspects is becoming more and more relevant in understanding and steering financial decisions.

The emergence of open banking provides a unique opportunity to influence and help consumers in a new and highly personalised way. In this blog we discuss how three concepts from behavioural finance can be recognised in personal finance and - most importantly - what opportunities they open up for personal finance solutions to help consumers effectively make better financial decisions.

Present-time orientation

The preference for receiving instant (or short term) value over long term value

One of the most tenacious challenges in personal finance is getting people to think actively about their financial future. Ask a twenty-five year old how much they are saving for their pension and the answer is likely to be ‘nothing’. In fact, behavioural finance teaches us that ⅔ of all financial decisions made by investors favour present-time value over any future value - even if that value is greater in the future. This psychological preference for the short term can be recognised in many ways in personal finance; for example in the simple notion that people are much more tempted to spend €50 each month on coffee than invest this amount periodically and earn interest on it. Similarly, spending €50 today is perceived as a bigger pain than having to spend €50 in two months.

The challenge is to get the critical mass of consumers to think about future subjects like pension, mortgages or investing in sustainability - all subjects that lack relevance for the financial situation of today.


The emergence of new tools for personal finance enables smart ways of making future considerations relevant for today’s financial situation. Since consumers are oriented towards their current situation, translating the effect of ‘future’ decisions back to the current financial situation creates an excellent touchpoint to influence decision-making. For example, Bittiq allows users to cancel a subscription and immediately invest the freed up money, creating a pain-free way of investing in the financial future. Similarly, saving or investing behaviour can be encouraged by having consumers make commitments now for a later point in time - leading to a smaller perceived pain. This approach plays into the (hyperbolic) discounting effect which is closely linked to presen-time orientation.

Mental accounting

The tendency to attribute value to money based on arbitrary mental categories

Mental accounting occurs when investors make irrational decisions as a result of attributing arbitrary mental ‘categories’ to money. Examples could be ‘money I can risk to lose’ or ‘money I worked hard for’. Emotionally, these categories influence decision-making whereas economically every € should be treated equally.

This effect is reflected in different forms in personal finance. For example, if people receive unexpected tax returns they are automatically more inclined to spend this money, rather than to invest it for later. Subconsciously, consumers attribute the category ‘extra money’ to their tax returns and it influences decision-making. Mental accounting can also have bigger financial implications. A report by Nibud for example states that 40% of people applying for a loan, in fact already possessed the same amount in savings. Economically, the rational decision is to spend savings before getting a loan - but people attributed a certain category to their savings, raising a threshold for spending it something else. 


Nibud states that consumers are initially led by their emotional decision-making (system 1) and only secondly by their rational decision-making based on information (system 2). The more people have to put in mental effort for processing information, the more they automatically rely on system 1. Personal finance solutions should thus reduce the effort required for processing information and make the ‘mental’ part of mental accounting visual, data-driven and automatic. Data visualisation can help consumers to reflect objectively on their arbitrary ‘categories’.  Moreover, solutions could include automation of money flows (tax returns to an investment account) based on data analysis.

Loss aversion

The inclination to reduce losses rather than increasing (the equivalent in) gains

Behavioural finance teaches us that the pain of a loss is twice as big as the joy experienced from a gain. In other words, preventing the loss of €10 induces the same psychological effect as being awarded €20. As a result, people are inclined to focus more energy on reducing or preventing a financial loss than on getting the equivalent in gains. The concept moreover not only applies in monetary values, but also in an emotional sense people respond more intensely to negative experiences.

If we project this onto personal finance, we notice this dynamic for example in the fact that many negative experiences in daily finance are experienced disproportionately. For example, a large nuisance we hear frequently at Bittiq is when people find anomalies in their financial administration. This can be an account unexpectedly going into the red, an unexpected transaction or when the balance seems out of the ordinary. The financial impact of these events is generally very limited, but it triggers a strong negative association because it goes against their psychological tendency for loss aversion. 


The opportunity here can be quite straight-forward: reducing or preventing a loss helps to make personal finance relevant for consumers. For example, UX research done by Bittiq shows that the communication strategy towards consumers is more effective if focussed on showing users a reduction in expenses. On a more emotional level, features focussed on identifying or preventing anomalies in personal finance can be applied to effectively reduce negative sentiments that users currently experience.

Final remarks

As personal finance becomes an increasingly individual exercise, the tools that are used by consumers should be designed in a way that aligns with the behavioural aspects of personal finance. Helping people make better financial decisions goes beyond just knowing ‘what makes a good financial decision’ - in fact that may be the simple part. The difficulty is in influencing the behaviour in an effective and supportive way (‘helping people’).

Behavioural finance gives us handholds in doing so and empirical evidence can indeed be recognised in personal finance. However, it should also be realised that personal finance comes with many other sentiments and challenges that differ strongly for consumers’ personal situation. The challenge is finding the right balance between the proposed concepts in behavioural finance and the consumer sentiments that play an important role in personal finance. By collectively experimenting and learning, we can close the gap between both concepts and create propositions that truly help people optimise their financial decision-making.