MONEY TOO TIGHT TO MENTION?

By Jackie Pearson
A new report by The Australia Institute explains why Australians are in so much debt.
The report, entitled Evidence versus emotion: how do we really make financial decisions? says that a large proportion of the community "confesses to not even knowing what their mortgage interest rate is or who their electricity provider is."
The report labels these consumers "the oblivious". By contrast a much smaller group are described as "human calculators" ... "hyper-vigilant in ensuring that they do not pay credit card interest, they compare phone plans and seek out things they need when they are on sale".
According to the report, orthodox or noeclassical economics is based on the idea that people behave rationally, whereas behvarioral economics is based on how people really do behave.
Orthodox economics makes some pretty interesting assumptions about human behaviour, according to the report, such as that "consumers have access to complete information, collecting and analysing information is costless... suppliers have no market power, there are no spillover costs or benefits associated with consumption decisions... people are motivated solely by self-interest".
The report goes on to say that behavioural economics indicates that, in reality, consumer behaviour is completely at odds with the above description. Instead we are creatures of habit, concerned about the approval of others, bad at computation when making decisions, want our actions and behaviours to be in line with our convictions,..."
According to the study's results:

• 28% of the population are over-confident. They think they are better-than-average at making financial decisions but their actual behaviour suggests otherwise;
• 18% admit to being overwhelmed but think it's too difficult to take steps to get a better deal;
• 30% are playing catch-up: don't pay their credit card balance each month and continue to use it to pay for essentials;
• 41% are oblivious: unconcerned or unaware that they could, in fact, get a better deal on their banking, mortgage or phone plan;
• 44% of people who took out a mortgage recently are described as 'eternal optimists': they took out the loan without considering the possibility of losing their job or getting sick

The other three categories are compartmentalisers, spending hawks, and, of course, the human calculators. 
So which group do you fit into? Are you a human calculator or honestly oblivious when it comes to your finances, or somewhere in between?
Do you know, for example, how much money you owe on your credit cards and how long, if you stopped making new purchases on those cards today, it would take you to pay them down to a zero account balance?
Can you honestly answer whether you are beating the bank when it comes to paying off your mortgage or are you completely behind the eightball, making regular redraws and not quite sure how many more years it will take you to own your home outright.
Todays headlines are talking about the European sovereign debt crisis pushing to global economy into stage two of the Global Financial Crisis in 2011.
Many Australians are, unfortunately, having their own personal financial crises right this minute. Another interest rate increase, a job loss or illness and they could be pushed over the edge.
According to The Australia Institute 52% of the respondents who had experienced financial difficulties in the past year said they did not pay off their credit cards in full. Forty one percent of all respondents said if they were in financial difficulty they wouldn't talk to anyone about it but would attempt to sort it out themselves.
In recent years the Commonwealth Government and Australian Securities Commission have been pouring substantial funds into improving our financial literacy. The Australia Institute Study would seem to indicate that we still have a long way to go.
It also adds evidence to the argument that many people don't understand the increasingly complex nature of the financial transactions they enter into. I commend the study to you. You don't have to be a rocket scientist to understand it and it could be a helpful starting point for changing your attitudes to your own financial situation.