By Mark Fairlie.

One in three adults – equating to more than 17 million people in the UK – say they would not be able to recover quickly from an unexpected financial shock or unexpected loss of income.

This comes from insurance firm Zurich’s latest research into how psychology impacts people’s approach to finances. The Cost of Resilience is the first study of its kind to look at human behaviour and risk perception with regard to how well British people are financially prepared to cope with unanticipated unemployment.

Half of UK adults in ‘potentially vulnerable’ financial situations

Last year, the Financial Conduct Authority published their annual Financial Lives Survey. The findings reported that more than half of adults in the UK show one or more signs that are characteristic of financial vulnerability.

The FCA state that as many as 25.6 million Brits are at increased risk of harm should they suffer sudden financial hardship, such as loss of a job or requiring serious home repairs.

A further 24% of people reported that they have little to no confidence in managing their own money. Following these findings, Zurich, along with neuroscientist Dr Jack Lewis, conducted an in-depth study into why so many people in the UK are struggling to handle their finances; and whether our psychology may play a part.

The report found that 34% of adults would fail to recover from a financial shock, with a further 24% admitting they had no savings to fall back on at all should they lose their income.

One in six adults said they had no disposable income to save. This lack of a safety net may be surprising to some, but it is a reality for more than a third of those living in the UK.

The science behind financial insecurity

Financial resilience is defined as the ability to recover from a shock. Should a sudden expense (or loss of income) arise, financial resilience works as the fall back to help people continue to meet their other obligations such as bills and food costs.

Financial resilience is, therefore, built up over time as people save money or purchase insurance to help them cope with these situations. Dr Lewis believes that the reason many do not make financial resilience a priority lies in people’s psychology and a phenomenon known as the “availability heuristic”.

Lewis notes that respondents surveyed in the Cost of Resilience study demonstrated all of the hallmarks of the availability heuristic. This psychological term describes the human tendency to feel a stronger perception of the risks we perceive to see more clearly.

Lewis’ example of this was asking a person which poses the greatest danger: nuclear power or sunbathing? He says that “the knee-jerk reaction is to say nuclear power because people quickly bring to mind examples of nuclear power stations around the world exploding.

“The truth is that skin cancer caused by sunbathing kills considerably more people annually than nuclear power accidents. Most people struggle to bring to mind examples of skin cancer victims, yet easily think of dramatic nuclear plant meltdowns from around the world – their perception of the actual risks are back to front.”

The cost of a lack of financial resilience

The Psychological Phenomenon putting People at Financial Risk

When applied to financial health, the availability heuristic explains why people often spend money on unnecessary items rather than save for their future such as for retirement. The study found that nine in ten people are more likely to prioritise their mobile phone insurance over their own life insurance.

Another example of the availability heuristic is income protection insurance. This coverage ensures that, should a person be unable to work and bring in an income due to illness or injury, they would be able to claim on their insurance to help them pay bills and afford food.

However, only 11% of those surveyed had income protection. In contrast, 71% had home insurance, 70% had taken out holiday insurance, and 18% insured their mobile phone.

Dr Lewis explains that

“we have a tendency to prefer items that we can enjoy immediately over and above more valuable things that we have to wait for, even when the latter add greater value to our lives overall. When it comes to managing our finances, such inclinations are very unhelpful.”