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Have You Secured Financial Wellness? Research Round-up

By better understanding where the problems with finance lie, business schools are working to find the solutions
  • Around the world, prices are increasing, and interest rates are rising to combat inflation
  • However, in general, wages aren’t rising fast enough to keep up with inflation, meaning people are struggling both mentally and financially
  • We take a deep dive into recent research published by business schools around the world about the topic of financial wellness

‘Girl math’ worked its way into our social media feeds at the end of 2023, and into 2024. What is girl math? It’s probably easier to explain with examples. If you buy a jacket from a store and then return it, you’re making money, TikTok dictates. Similarly, if you buy a drink via an app in which you’ve pre-loaded money, your drink is free.

Whilst, for the most part, it’s a deeply unserious trend that sees women mocking their own purchasing behaviour, it’s started a backlash of ‘boy math’ which quotes the likes of Elon Musk, and his purchase of Twitter/X: “Boy math is paying $44 billion for a $25 billion company and, through business smarts and entrepreneurial know-how, turning it into an $8.8 billion company” writes one X user.

TikTok trends aside, the subject of financial wellness is becoming an increasingly important one. In 2023, global prices rose by approximately 7.4 percent on average, despite rising interest rates, according to a recent Economist Intelligence report. Compounding the problem further, the majority of global economies have seen wage levels stall and fall, making the day to day costs of living even tricker. This has left individuals struggling, both mentally and financially.

The start of a new year is rarely a good time for establishing financial wellness, but 2024 may well prove to be more challenging than most. In this article, we take a deep dive into the recent research published by business schools on the subject financial wellness, exploring how to find it (and keep it!), how to spread it to others, and the barriers standing in the way.

Lack of education about money…

Individuals have a shocking understanding of personal finance, finds Stanford Business School Graduate School economist Annamaria Lusardi, who has been tracking financial literacy in the US for two decades.

Her latest paper examined the range of financial literacy amongst individuals across the US, and found that;

  • Just over half (53 percent) of respondents demonstrated an understanding of how inflation works.
  • Two-thirds (69 percent) knew how to do a simple interest-rate calculation.
  • Only 42 percent understood how, when it comes to investment risks, mutual funds are generally safer investments than a single company’s stock.

The study found that those who were young, less educated, female or not employed scored the lowest. Black Americans and Hispanics were also among the least financially literate.

“Financial illiteracy has been and continues to be a global phenomenon,” says Lusardi, who has been active in addressing this challenge by teaching financial literacy to undergraduate students for more than 10 years.

Her research found that individuals who can understand basic financial concepts are better at managing money, saving more for retirement, making smarter investment decisions and managing their debts more effectively.

Lusardi believes financial literacy can be helped by providing people with a basic education in finance.

We may soon see the result of this. More than half of US states have added personal finance instruction as a high school graduation requirement. Many universities are also now offering personal finance courses.

Encouraging people to save

Another aspect of personal finance that people often neglect is savings. Today, only about half of adults in developing countries can quickly access funds to cover an unexpected expense, and 1.4 billion do not use bank accounts at all, found research from the World Bank.

Sometimes this is because individuals do not have money to save, but sometimes this is due to a lack of trust from banks, or having to travel a long distance to access a bank, says Sean Higgins, assistant professor of finance at Kellogg.

If gaining interest on your savings isn’t enough to incentivise you to save your hard-earned cash, perhaps you should open a savings account that gives you the potential to win a prize, suggests new research from Kellogg School of Management, Northwestern University.

A prize-linked savings (PLS) account is a type of financial product offered by banks and credit unions worldwide, that gives users a ticket for a cash-prize drawing. The researchers found that these cash incentives increased the number of new accounts and deposits as well as the total amount of money saved at each branch.

“Unlike a traditional lottery, where you’re likely to lose money, you get to keep the principal in your PLS account no matter what,” Higgins says.

Growing pay inequality

Of course, saving is only possible if you’re earning more than you’re spending. But pay inequality could increase over the coming years, says Melanie Wallskog, assistant professor at the Duke Fuqua School of Business.

Wallskog’s research found that this is largely down to the difference in pay in different firms, rather than the differences internally in organizations. 

“It’s not the difference between how much CEOs make versus how much their firm’s average worker makes that explains most of the recent rise in inequality,” she said.

There are several reasons for this, says Professor Wallskog. Newer entrants might pay similar workers differently, or they might hire different workers. They might also specialize in technologies and processes that result in lower pay.

Newer firms are more likely to specialise in whom they hire, she said. For example, some firms might only hire college-educated workers, which Wallskog says produces more pay inequality across firms.

The solution to combatting pay inequality? Regulation could play an important role, the research suggests. For example, a policy that limits offshoring and forces companies to hire more domestic workers is likely to reduce inequality.

Payday loan stigma

Poor pay and rising costs mean that payday loans become more attractive to vulnerable individuals. The stigma of payday loans causes negative mental wellbeing side effects for loanees, finds new research from Durham University Business School

New research from Durham University Business School states that the stigma of payday loans causes negative mental wellbeing side effects for loanees.

Chrysostomos Apostolidis, Associate Professor of Marketing at Durham University Business School, alongside his colleagues Dr Jane Brown, Newcastle University and Prof Jillian Farquhar, Solent University, discovered three effects that payday loans have on borrowers:

  1. Payday loans not only spiralled users into more debt due to the high interest rates they demand, but also the stigma such loans typically have attached to them.
  2. Payday loans were revealed to affect the relationships borrowers had with their family, friends and other members of society
  3. Hiding the use of Payday loans further compounded the negative effects as it limited the opportunity for borrowers to get the support they needed – whether emotional or financial – because of the shame or embarrassment they felt as a result of using the service. 

However, the researchers did also find individuals who had positive experiences with payday loans. These individuals said it had allowed them to access the funds required to meet their needs and improve their financial, emotional and social wellbeing.

Such positive incidences were commonly associated with very careful financial management. The users who found benefits in payday loans were also those who were able to pay the loans back after a short time.

Instability in income impacting health and wellbeing

People with unstable incomes – such as those who rely on commission and tips to supplement their earnings – are more likely to report health problems, such as insomnia, headaches and stomach issues, found new research from emlyon business school.

Interestingly, in the study, it appeared that even on days workers did earn money, those who relied on tips didn’t feel physically better than other workers.

This could be, the researcher Professor Gordon Sayre reasoned, because these employees were working so hard for the tips that they end up overworking themselves.

However, he also raises the question of whether these health effects were a consequence of low pay in the first place? For example, many countries require people to pay for their healthcare, and individuals earning low wages may be less likely to book health appointments.

The link was not limited to those with low earnings, but also applied to higher-paid professionals working in finance, sales and marketing where commissions and performance bonuses are common. 

To solve this problem, Professor Sayre suggests that companies should strike a balance by reducing an individual’s reliance on volatile forms of pay, and offering a more substantial base pay instead.

Payment as an incentive

Can financial rewards act as incentives to inspire better work, asks new research by New York University PhD student Pamela Osborn Popp, University of New South Wales‘ Ben Newell, Chicago Booth‘s Daniel Bartels, and NYU’s Todd Gureckis.

The answer is, perhaps unsurprisingly, yes – but it does depend on the type of work. If the tasks require sustained and careful effort, financial incentives can motivate better performance. If, however, the task is more centred around learning and insight, it’s unlikely that financial incentives will inspire better outcomes.

“There are cases in which you literally can’t follow the money,” Osborn Popp says. “Your brain can only do so much.”

The impact of Web3 and AI on personal finance

While there may be a limit to the human brain, there isn’t such a problem in AI, which is ever-expanding its capabilities. Finance is the latest industry to be affected by this technology.

In fact, Web3 and AI will transform personal finance, says Rishi Ramchandani, the APAC Web3 Lead at Google. 

Blockchain, for example, will make it easier to access financial services from anywhere, writes Jason P Davis, Associate Professor of Entrepreneurship and Family Enterprise at INSEAD, and Juliet Kasko, Founder of Global CxO and entrepreneur-in-residence at INSEAD.

In the past, says Davis and Kasko, huge sums of money were often locked up in financial markets due to middlemen and other forms of operational friction. The decentralised, community-based and owned nature of blockchain technology makes it possible to bypass traditional, institutionally owned systems – together with their associated fees, rules on minimum transaction volume and operational lag. 

Not only this, but digital assets and the underlying blockchain technology have changed how investors can engage with and benefit from real estate investments. Now, real-world assets such as mortgages are being converted into digital tokens on a blockchain.

For those who are both financially and technologically literate, the opportunities are vast. But for those already struggling to keep their finances straight, now faced with another new system to learn the difficulties will only rise, limiting the ability to not just recover some financial sustainability but build upon it.

A fast-changing sector

And the opportunity to accomplish this seems to be getting smaller. By the fourth day of the year, known as ‘Fat Cat Thursday,’ the median FTSE 100 CEO’s pay had exceeded the average worker’s salary for the year. The Trades Union Congress, which represents 48 member unions across the UK, said the figures show ‘obscene levels of pay inequality’. Additionally, as the Duke Fuqua School of Business found, inequality is set to keep increasing over the coming years.

Clearly something needs to change. Business school research is more important than ever to highlight inequality and better understand where things are going wrong. By better understanding the problems with finance, we can work to find a solution.

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