Published by Jessica Weisman-Pitts
Posted on November 8, 2022
5 min readLast updated: February 3, 2026
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By Nina Bartmann, Senior Behavioral Researcher at Center for Advanced Hindsight
Managing money is difficult. Even before the pandemic – when supply chains weren’t disrupted and the economy wasn’t facing soaring inflation – the majority of Americans (70%) reported struggling financially. One reason might be that merely half (57%) of all adults in America classify as financially literate.
And this problem is not confined to “regular” people. Even NFL players, who many people imagine have no money worries, can suffer from a lack of financial literacy and – as this recent New York Times story illustrates – are easily tempted to overspend.
How can financial institutions, consumer advocates and even fintech innovators help advance financial literacy and embed better financial habits? The field of behavioral science helps us understand how we as humans make (financial) decisions and can illustrate how to best overcome the behavioral biases that often get in our way.
When designing products or programs for consumers and communities, accounting for three key behavioral biases can lead to dramatically better outcomes.
Opportunity cost is the activity (including its enjoyment, cost, etc.) you are forgoing by choosing another activity in its place. For example, by reading this article you are opting to learn about behavioral science and missing out on another topic you might have read about instead.
This principle also applies to the way in which we spend our money. For example, when deciding between two smartwatch models – a cheaper and a more expensive option – the differences related to features and price quickly come to mind. Yet, most people fail to consider what they give up when choosing the more expensive options. For example, what else might you be able to purchase with the money saved from choosing the cheaper model? A pair of wireless earbuds to accompany the new smartwatch? Or perhaps a new pair of running shoes?
To help consumers overcome this tendency to ignore these trade-offs when making financial decisions, remind them about the trade-offs their decisions entail. Good opportunities might be when a customer’s account balance drops below a certain amount or their minimum credit card payment is due. Use these openings to send them a prompt (i.e. via text message or email) to think about what else the money – that will soon be spent on late-fees, interest, etc. – could be spent on.
In a famous study, researchers found that more individuals would spend $10 on a theater ticket if they had just lost a $10 bill than if they had to replace a lost ticket worth $10. This shows that people spend money differently depending on which mental account the money came from and where it is going.
Rather than thinking of money as “fungible”, that is interchangeable regardless of its origin, traditional budgeting can sometimes restrict a person’s decision-making process.
To overcome this bias, help your clients and customers by setting them up with a budgeting tool that breaks their expenses into only three mental accounts, following the 50-30-20 budgeting rule: essential expenses, non-essential expenses and savings. Even better, given your customers monthly income, make that allocation for them; provided your product allows for it.
Not understanding the power of compound interest – both its ability to make wealth grow faster and its danger of snowballing debt – can lead people to fall victim to exponential growth bias and subsequently lead to harmful investing and debt payment strategies.
The most effective way to build wealth over time is to allocate income toward the debt or the investment with the highest interest rate, thus minimizing interest payments or maximizing savings growth. Yet, this is not what households tend to do. Instead, people have a tendency to pay off smaller debts first, thus reducing the total number of debts (e.g., from a car loan, a mortgage, and credit card debt to only a mortgage and credit card debt) instead of reducing the total amount of debt.
To help, encourage consumers to set-up automatic payments to the debt account with the highest interest. Another simple way to avoid the pitfalls of exponential growth bias is to encourage consumers to consolidate and refinance their debt, thus minimizing the number of accounts they have when making investing and debt payment decisions.
Helping people overcome behavioral biases by designing an environment that naturally accounts and adjusts for these behaviors can lead to stronger financial health over time by defaulting customers to the right decision. That’s a win for everyone, even NFL rookies forced to buy an expensive team dinner.
About Author:
Nina Bartmann is a Senior Behavior Researcher at Duke University’s Center for Advanced Hindsight, focusing on applied behavioral economics research with the aim to drive measurable change in the domains of health and finance.
Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.
Opportunity cost refers to the potential benefits an individual misses out on when choosing one alternative over another.
Mental accounting is a behavioral finance concept that describes how people categorize and treat money differently based on its source or intended use.
Exponential growth bias is the tendency to underestimate the impact of compound interest on investments or debts over time.
Behavioral finance is a field of study that examines the psychological influences on people's financial behaviors and decisions.
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