Consumers are too easily bamboozled by promotional material for mortgages, credit cards and insurance products, and frequently look at top-line figures without thinking too much about what is the best value in the long term, research published on Tuesday suggests.
The review of more than 140 studies by the Economic and Social Research Institute (ESRI) says many consumers pay only the bare minimum off their credit card debt each month because that is what lenders suggest they do, even though adopting such an approach always ends up costing people dearly in the long run.
It also indicates that people typically underestimate how long it takes to repay debt and struggle to understand how mortgage costs can vary from lender to lender. They also place too much weight on immediate monthly repayments as opposed to costs over the lifetime of a loan.
Consumers also appear too optimistic when considering how well their investments are likely to perform and typically imagine things will work out in their favour. They also struggle to understand the trade-off between insurance premium prices and the excesses attached to such products.
A common theme among the research body’s findings is that when financial products have multiple features, consumers struggle to take into account all the attributes that matter for their financial wellbeing, usually to the benefit of companies selling such products.
"It has become clear that many consumers find modern financial products difficult to deal with," said Pete Lunn, head of the ESRI's Behavioural Research Unit. "The evidence suggests a need to keep everyday financial products simple."
He suggested that when complex financial products are offered to consumers, pre-testing them using behavioural techniques should be considered. “Such pre-tests might help to ensure that innovative financial products offer genuine value to consumers.”