While technology has given us more control over our financial lives — online shopping, online banking, mobile payments, automatic deposits — it may also be changing how we view and value money.
Growing evidence suggests technology is affecting financial decision-making, and when coupled with deep-rooted financial attitudes and behavioral biases, there can be some real negative consequences.
These biases — combined with emotion — can drive investors to make bad financial decisions, says Angie O'Leary, head of wealth planning for RBC Wealth Management-U.S. in Minneapolis. People's social media networks, for example, may influence irrational behaviors, their need for instant gratification and an over-reliance on inaccurate information, she says.
On the other hand, technology can be a friend. Mobile apps help people better track their finances and help them overcome behavioral biases, such as overconfidence on limited information or an aversion to losses, O'Leary says.
Psychologists Daniel Kahneman and Amos Tversky pioneered research in behavioral finance in the 1970s, and found investors tend to shy away from uncertainty and make decisions based on incomplete information or irrational thought.
People's financial attitudes and resulting financial behaviors, such as budgeting or impulse shopping, tend to start in childhood. Lessons over time from other influences, such as school and social media, further shape attitudes towards money.
O'Leary says taking the emotion out of your finances should be the top goal in making better decisions. The best way to do that is to create a financial plan, which helps set budget, savings and spending goals, taking into consideration financial risks and future life events, to help investors stay on track toward their short- and long-term financial goals.
While technology may help us make more informed financial decisions, “having a trusted advisor is still an important part of helping clients be aware of their biases and understand when their emotions kick in," says O'Leary, who leads a team focused on goals-based planning, which identifies, tracks the probability of success, and figures out how to fund investors' goals.
Today's digital world often means people have a broader network of potential social influences than ever before. But are those influences positive or negative?
Paul DeLauro, manager of City National Bank's wealth planning team, says technology may be having a negative effect on financial decisions.
Some of the ways that technology is negatively influencing financial decisions are:
The increased amount of electronic payments carries positive and negative influences. Electronic payments accounted for 11 percent of all U.S. consumer transactions in 2015, up from 7 percent in 2012, according to the Federal Reserve Bank of San Francisco.
DeLauro and O'Leary think this shift is changing how people value money. The more removed people become from their money, the less they may think about how much they're spending and saving.
DeLauro compares it to how casinos exchange money for chips: “The reason you gamble with plastic chips at a casino — and not cash — is, it becomes less real," encouraging people to spend more, he says. “The more tech we go, the less people value currency."
O'Leary, who has been studying the cashless, technology-driven environment, has concerns, too.
“If transactions are just a flash on your smart phone, and we're not handing over cash in exchange, the risk is: how will we be able to measure the value of a latte?" she says. “It's already becoming an issue."
More than half of Americans (57 percent) have less than $1,000 in a savings account and more than a third have nothing saved, according to a 2017 GoBankingRates survey.
“Generally, people are not getting better at saving through technology; they're getting better at spending," DeLauro says.
On the positive side, electronic payment apps, such as Zelle and Venmo, have made transactions easier and faster.
Here are some other ways technology has simplified investors' financial lives:
In general, technology may make it “easier to see where you stand financially," O'Leary says. “Your bank or budgeting app shows you right away; you don't have to wait for a paper statement."
This article is a republication of content originally published by RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. © 2018, Royal Bank of Canada, used with permission.
City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the report with no obligation to update or notify of inaccuracy or change. This report may not be reproduced, distributed or further published by any person without the written consent of RBC Capital Markets, LLC. Please cite source when quoting.
City National Bank is an affiliate of RBC Wealth Management and a subsidiary of Royal Bank of Canada. Products and services offered through City National Bank are not insured by SIPC. City National Bank Member FDIC.
Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.