Many provinces across Canada have been ramping up financial literacy education in schools, and for good reason. But while teaching the basics is important, we may be missing a crucial piece of the puzzle: the psychology of money.

A recent study of middle-school students in Italy found compelling evidence that financial education can have a causal impact on financial behaviours. The study showed that students who took a financial literacy course were significantly more likely to make better decisions in money-related tasks compared to a control group.

However, anyone who has ever made a New Year’s resolution to save more or spend less knows that simply understanding what we should do doesn’t always translate into action. Adults can easily learn the basics of budgeting, compound interest and diversification. The real challenge is in applying that knowledge consistently.

This is where behavioural finance comes in. Over the past few decades, researchers have uncovered numerous ways in which human psychology influences our financial choices, often leading us astray from what traditional economic theory would predict.

Take the concept of “present bias” for example. We tend to place disproportionate weight on immediate rewards compared to future ones. Every financial choice can be boiled down to a trade-off. Want to save for a future goal? You have to give up some current consumption (painful) in exchange for some future reward (joyful).

But the psychological weight of either the pain or the joy is affected by when we perceive it happening. The pain of giving up consumption today is magnified precisely because it’s being felt now. The joy of having a large pot of money in the future is minimized because it’s in the future.

This helps explain why it’s so hard to save for retirement or stick to a budget when tempted by immediate purchases. Or when thinking about going to the gym next week. It seems a lot easier to envision going to the gym four or five times next week. But then next week arrives and I’m left wondering what last week’s version of me was thinking.

In a fascinating study where people were asked to choose between a healthy snack and a sugary treat for a seminar happening in one week, making the decision in advance, about 74 per cent opted for the healthy option. But when asked again on the day of the seminar, the results completely flipped – suddenly 70 per cent wanted the sugary snack. This dramatic shift in preferences as the moment of choice draws near mirrors how we often intend to save more but end up spending in the moment.

Another intriguing study looking at the effect of language on trade-off choices shows that people who speak languages with less distinct grammar for future versus present tenses (such as German where the phrase “Morgen regnet es” translates to “It rains tomorrow”) tend to save more than those with more pronounced grammatic separation between tenses (such as English where we would say “It will rain tomorrow.”

The theory is that treating the future as linguistically distinct makes it feel more distant psychologically. And the more distant the future feels, the more abstract and less real it feels.

These insights from behavioural finance don’t just make for interesting cocktail party trivia – they have profound implications for how we approach financial education. By teaching students not just the mechanics of money management, but also the psychological pitfalls that can derail good intentions, we can equip them with more effective tools to navigate real-world financial decisions.

Some ideas for enhancing financial literacy programs:

• Incorporate lessons on the psychology of money and how they affect financial choices.
• Teach strategies for decision-making, such as setting up automatic savings transfers to help avoid the influence of present bias.
• Use visual aids and exercises to make long-term financial goals feel more tangible.
• Discuss the emotional aspects of money and how to manage financial stress.
• Explore how social influencers and advertising can shape spending habits.

By blending traditional financial education with insights from behavioural science, we can create more engaging and effective curriculums. Students might find discussions of psychological quirks more relatable and memorable than dry facts about interest rates. This approach could help bridge the gap between financial knowledge and action.

In the world of personal finance, knowing what to do is only half the battle. Understanding why we often fail to do it and how to overcome those obstacles may be the key to truly improving financial well-being for generations to come.

Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.