- Psychotherapist Dr Jo Gee and financial educator and behavioural economist Alice Tapper share top tips to overcome financial fears and mental bias
Investing, particularly in a cost-of-living crisis, can feel daunting. The thought of losing any hard-earned cash might seem terrifying, however, findings from a new study by Virgin Money may leave Brits reconsidering their attitude towards investing.
To put risk into perspective, the study of 1,000 people investigates attitudes towards risk and confidence, by comparing real-life danger* with how risky people think a range of everyday and financial activities are. The research comes as Virgin Money launches a new, straightforward investment service Link opens in a new window designed with simplicity in mind, to make investing easier to understand and give customers the confidence to make smart decisions when it comes to managing their money.
To give people the confidence to overcome their apprehensions around taking risks, Virgin Money has partnered with financial educator, behavioural economist and founder of ‘‘Go Fund Yourself’ Link opens in a new window’ Alice Tapper, as well as the clinical Psychotherapist Dr Jo Gee Link opens in a new window, to dive deeper into the reasons why people might be unwilling to step outside their comfort zone.
Understanding the ‘fear gap’
Humans are biologically programmed¹ to avoid situations that make them feel scared. When Brits were asked what prevents them from taking risks, the most significant blocker was the fear of an unknown outcome (29%), followed by the fear that something bad will happen (26%).
This can inflate the idea of how risky situations are and create a ‘fear gap’; the difference between the actual chances of something bad happening and the perceived risk attached to the scenario.
For example, the research asked respondents how risky they perceive certain situations to be, using a scale of 1-10, where 1 represents no risk of something bad happening and 10 would indicate a high risk of a bad outcome. Brits rated driving to work as 5 out of 10, eating food after dropping it on the floor also as 5 out of 10 and rated having a bath as 4 out of 10. However, these are all activities that many people do every day without being put off. In fact, the reality of something bad happening in these situations is as tiny as 0.01% for driving to work, 5.25% for eating food after dropping it on the floor and 0.00001% when it comes to having a bath.
Overcoming our financial fears
This aversion to risk translates into people’s personal finances too. The study found that Brits rated investing their money now as 6 out of 10 in terms of riskiness, and rated investing their money 10 years ago as 5 out of 10 on the same risk scale. However, by not investing, people also risk losing money to inflation, as the purchasing power of money decreases as the cost of goods and services increases, meaning money is effectively worth less. While investing is not risk-free, as with other risks, our brains aren't always very good at assessing how risky it actually is, which can cause us to lose out in the long term.
Alice Tapper’s research, using data from economist Robert Shiller, shows that if consumers had invested £1,000 in an S&P 500 (The Standard and Poor's 500) fund 10 years ago, and continued to invest £100 each month, the final value of their portfolio would be £23,765, meaning they would have actually grown their money by £11,765.
Alice explains: “We have a tendency to seek out information that confirms our existing beliefs and ignore any information that contradicts them. For example, if you hear that a friend of a friend lost a lot of money in investing in shares, you might use this information to confirm your belief that you should only ever keep your money in a bank account. However, the risk is significantly lower when investing money in an investment fund, as the risk is spread out, so the outcome could be much more positive. To counter this bias, we can actively seek out reliable and balanced information from trustworthy sources.
“Our minds aren't always very good at accurately working out how risky certain activities are, and this is called a mental bias. Mental biases are errors or glitches in our thinking that can lead us to make less-than-ideal decisions, often driven by fear. By understanding the ways in which our minds can create fear around investing, we can take steps to counteract these biases and make more informed decisions about our money.”
So, what can people do to conquer their fear? When asked what gave people the confidence to take risks, the most popular response was having a full understanding of the risks associated with the activity (30%), followed by previous success in similar situations or activities (21%).
To help people overcome their fear of risk and reap the rewards, Dr Jo Gee shares her top tips for building confidence:
- List the pros and cons
“When we list pros and cons, we carefully weigh up the advantages and disadvantages of taking a risk, allowing us to employ our rational mind and sidestep powerful emotions like anxiety and dread. This helps us to think more clearly and to really understand the positive gains involved in taking a risk. Usually, the ‘cons’ or hurdles seem more manageable when broken down and put into perspective.”
- Learn from other peoples’ experiences
“Ask trusted friends and advisors who have already completed the activity for their experience. Vicarious confidence, where we gain inspiration and confidence through watching or hearing about others’ experiences, can lead to actual changes in our thoughts, feelings and behaviours.”
Jonathan Byrne, chief executive officer at Virgin Money Investments said: “When it comes to risky situations, the fear of an unknown outcome is the number one barrier preventing people from taking the leap. To empower more people to take the leap when it comes to investing their money, we need to put risk into context and help change people's perceptions. By putting risk into perspective and understanding the ‘fear gap’ between actual and perceived risk, we can really understand how exaggerated our apprehension can be. Investing should be straightforward and accessible, and we are committed to giving people the confidence they need to get started.”
For more information about Virgin Money Investments, head to https://uk.virginmoney.com/investments/ Link opens in a new window
Notes to editors
* Virgin Money does not offer financial advice but does provide tools and information to help customers decide for themselves.
There are two clear and simple charges for both the stocks & shares ISA and the non-ISA account: an account charge of 0.30% p.a. for managing the account and an annual management charge of 0.45% p.a. for managing all investments. These fees are based on the value of the account and apply to each of the adventurous, balanced and cautious growth approaches.
To earn 8,000 Virgin Points, customers need to: Open a Stocks and Shares ISA or Investment Account, pay in at least £5,000 by 30 June 2023 and keep it invested until 31 July 2023. This can be a one-off payment and/or monthly payment. Customers can also transfer from an existing investment by 29 September 2023. Further terms apply. Find full terms here Link opens in a new window.