What is economic psychology?

By Professor Rob Ranyard

About the author

Rob Ranyard is a freelance researcher and Visiting Professor of Leeds University Business School affiliated to the Centre for Decision Research (CDR). He is President-Elect of the International Association for Research into Economic Psychology (IAREP), and has previously held various research and lecturing posts, including Professor of Psychology at the University of Bolton from 2001 to 2014. He has undertaken psychological research using a range of methods and has published widely in economic psychology and decision research.

Most recently, Rob co-authored and edited Economic Psychology, published as part of the British Psychological Society textbook series.

So what is economic psychology? In the introduction to our book, Economic psychology, I describe it as the science of economic mental life and behaviour. The book presents a present-day overview of the field across twenty eight chapters, written by experts in the field. Several chapters focus on personal and household decision making, for example:

  • decisions about saving for a rainy day or for retirement
  • borrowing to improve today's lifestyle
  • issues of managing tax affairs and financial risks.

In other chapters, we cover the fascinating aspects of economic mental life, such as: people's thoughts and feelings about material possessions, money, prices, the economy, inflation.

Taking broader perspectives on economic psychology, later chapters look at life-span development from childhood to old age, and societal issues such as charitable giving and pro-environmental behaviour. Throughout the book, practical and policy implications for supporting economic decision making are addressed.

This publication was written with three groups of reader in mind: researchers in both economic psychology and behavioural economics, students in such disciplines, and general readers.

Why is economic psychology important?

Economic psychology is a branch of applied psychology defined by Stephen Lea and co-authors as “the study of how individuals affect the economy and how the economy affects individuals”. One way that individuals influence the economy is by their expectations: when expectations are positive people are more likely to spend and borrow, but when negative they are more inclined to save. For those managing the economy, it is therefore important to understand and predict people’s expectations and perceptions of, for example, inflation.

Understanding how the economy affects individuals and households is equally important. For example, the burden of high value loans, in relation to household income, is a major problem for too many these days, and the economic environment has a significant impact on borrowing behaviour. Easy access to credit has intensified debt problems for some, while exclusion from the mainstream credit market has left others with only high-cost credit options. Although research to date has informed these issues, more work is needed to resolve them.

The International Association for Research into Economic Psychology (IAREP)

In 1976 a group of twelve economic psychologists gathered in Tilburg, The Netherlands, to discuss their research. This was the first of a series of annual conferences of IAREP. IAREP conferences have continued to attract researchers from across the world, and the society’s Journal of Economic Psychology, founded in 1981, continues to grow in visibility and impact. Having participated in the society and published in the journal since the mid-eighties, I was pleased and honoured to be elected President-Elect of IAREP at the 2017 conference.

The society’s website explains how students and researchers can join the society and gives further information on past and future conferences and workshops. In July 2018, the 43rd IAREP-SABE Conference will take place in London (SABE is the Society for the Advancement of Behavioral Economics, also created in 1982).

Professor Rob Ranyard presenting at IAREP

Economic psychology at the Centre for Decision Research (CDR)

CDR colleagues are engaged in economic psychology research on topics such as borrowing and saving, age changes in economic decision making and judgements of inflation. To showcase this research, CDR members have written and recorded a series of articles for the Research & Innovation Blog.

The psychology of borrowing and over-indebtedness

In our interview study of spending and borrowing at Christmas, we asked people what Christmas meant to them. Most agreed the festive season is about family and exchanging gifts, with some seeing it as a time to indulge, either through buying for one’s own pleasure, or by socialising. Christmas can also be a stressful time, particularly bringing financial worries. This was confirmed in a recent British survey carried out for the Money Advice Trust which questioned a representative sample of more than 2000 adults. Approximately 16% stated that they were likely to fall behind with their credit repayments because of Christmas spending. In our own questionnaire study, we found that borrowing at Christmas was related to the type of coping strategy people tended to use to deal with financial pressures. These coping strategies include denial, emotional release and acceptance. Emotional release often allows for clearer thinking than those in denial. We therefore suggested that interventions to help people develop more effective financial decision making strategies might be useful - in particular, the use of active coping strategies, such as realistic budget planning, rather than coping by denial and inaction.

In another line of research, with Sandie McHugh at Bolton University, we have explored the information that should be provided to best support people's initial credit choices and their subsequent repayment decisions. This research involved participants completing a consumer credit questionnaire. We concluded from these studies and the wider literature that although the annual percentage rate (APR) of interest charged is useful for borrowers, it is a complex statistic that can be misunderstood. Consequently, additional information that is more consistent with people's mental representations of credit transactions, including the monthly repayment and total cost of credit, is necessary for informed credit decisions.

Turning to credit repayment decisions, we found that a common repayment strategy is to repay as much per month as possible in order to reduce the total cost and the loan duration. We also found that although minimum repayment information can lower repayments, this can be counteracted with information on the longer-term consequences of much higher repayment levels.

In the UK, consumer debt continues to weigh heavily on individuals and households, with consumer borrowing rising again towards the high levels seen in 2007 just before the Great Recession. An Institute of Fiscal Studies analysis of British survey data found that debt repayments are a particularly heavy burden for the poorest fifth of the population. For this sector, about half of their relatively low income can go on debt repayments (an average of £457 from £1012 monthly income).

Contactless payment being made

CDR member Simon McNair’s ongoing three-year Leverhulme Early Career Fellowship project sees him working with Citizens Advice Bureau in Leeds and Bradford, aiming to develop an advice resource for people experiencing debt issues. How people react to stress, or feelings of helplessness may often interfere with how people confront their financial issues, and undermine attempts to overcome these issues. The project aims to produce an advice resource that targets the key types of psychological barriers that accompany debt, such as feelings of self-consciousness, stress, and self-criticism.

For more information on the topic of economic psychology, take a look at the following publications and chapters:

  • Saving behaviour - Barbara Summers’ collaborative project on people’s thoughts, feelings and behaviour concerning pension saving is described in her recent blog
  • Age-related changes in economic decision making - Wandi Bruine de Bruin reviews research on this issue, including her own, in chapter 23 of Economic psychology
  • Perceptions and expectations of inflation - Drawing on our literature review with Barbara Summers, chapter 10 of Economic psychology evaluates the state of the art of research on this topic, including my collaborative work with co-authors Fabio Del Missier and Nicolao Bonini on perceptions of inflation, and Wandi Bruine de Bruin’s research on inflation expectations.

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