Why do we behave in the way we do?
It could be to do with our own personality and motivations. It could be framed by what we have learnt from experience, ours or others, or what we have been taught. It could be to do with the choices we are given, or how they are presented to us.
I find the world of behavioural science fascinating: understanding how people behave and make decisions, and what influences their choices. And of course, when the theory clashes with the practical, then it gets really interesting.
Why did I buy that dress when I didn’t need it? Why did I eat that cake, just because my friend did? Why did I choose a cash ISA when I wanted to save for something long term?
Since the Spring Statement announcement that the Government wants to review ISAs to get a better balance between cash and equities, there have been numerous ‘solutions’ flying around. Most of these are based around restriction; either restricting the amount of money that can be paid into cash ISAs each year, or restricting where the money can be invested to push more into UK plc.
I feel these discussions are missing the point. ISAs are a phenomenal UK success. In 2022-23, Brits paid into almost 12.5 million accounts. But most pay into a cash ISA, and only 16% of ISA holders hold both cash and investment types.
Why?
AJ Bell recently commissioned some behavioural science research to explore the UK’s ISA system and behavioural barriers blocking growth in retail investing. The report makes interesting reading.
Once someone has decided to save within an ISA, they are immediately asked to choose between being a ‘saver’ or an ‘investor’. To pin their colours to a mast. To choose a team. Most choose the saver route; 70% of ISA holders* do not even consider opening a stocks and shares ISA.
And once they are in, there they will stay. HMRC statistics show just 16% of ISA holders have both cash and stocks and shares ISAs. This isn’t a good outcome. Most people need both ‘rainy day’ cash and long-term risk investments in different proportions at different times of their lives.
If you were to design an ISA system from scratch, you would allow for this. You would create a product that allows you to move easily between cash and investments, to dial one up or down, when necessary. You wouldn’t design one that badges you as a cash saver from day one, needing a Herculean effort to move to investment. (Because for most people filling in forms and ‘doing life admin’ can be a Herculean effort, however easy providers make it.)
The report backs the case for a single ISA that merges the cash and investment options. It illustrates the impact divisive choice and friction in the ISA market has had on consumer behaviour.
There’s emerging academic evidence that simpler choice architecture leads to better outcomes. That reducing unnecessary options and streamlining decisions can help with decision paralysis. If people are faced with too many confusing choices, they often revert to easy options or the status quo.
Translate this to the ISA world, and it’s easy to see that having separate ISA products may be deterring people from choosing investment ISAs. Instead, a unified ISA could leverage the power of simplification through one decision framework and one set of rules, and so lead more people to invest for their long-term financial security.
The Government appears to be in listening mode and thinking through the solutions different factions are presenting them with. That’s good. But let’s hope they don’t rush into a solution that only tinkers around the edges by introducing more complexity or restrictions, and instead embrace the bolder idea of simplification that has the power to make a real difference to the cash / investment dynamic.
* Hyde and Reynolds, 2024
