The Psychological Drivers of Financial Decision-Making: Enhancing Financial Literacy to Improve Personal Finance Management and Wealth Accumulation.

Naomi Ugbala; Ayooluwa Tomiwa Animashaun; Vinuyon Modupe Ramos

doi:10.18535/ijsrm/v11i09.em14

Abstract

This research main objective has been to determine how psychological factors affect financial decisionmaking processes as well as individual financial behaviors are affected by psychological factors. This work aims to discuss specific psychological factors that underlie financial decisions and the importance of financial literacy to correctly approach the financial aspect and increase the level of saving and investment. The paper also seeks to analyze how some forms of cognitive bias, frame effect impact choices and emotions, self-signaling in relation to decision-making as well as self-control in managing money and illustrates how each of these factors can either have a deleterious effect or improve financial wellness. It posits that financial literacy reduces the impact of psychological biases on financial decision –making process in order to enhance the quality of financial decisions. It also provides information that can help individual, financial institutions as well as policy makers to encourage better decision making regarding financial products through informative financial education. This work specifies the psychological motives and thus explains the psychological factors inhibiting sound wealth creation and makes a point about the necessary component of personal wealth to be financial literacy.

Keywords

Psychological driversFinancial literacyDecision-makingCognitive biasesWealth accumulationPersonal finance managementBehavioral finance

References

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The Journal of socio-economics, 41(5), 677-690.Google Scholar ↗
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Hilton, D. J. (2001). The psychology of financial decision-making: Applications to trading, dealing, and investment analysis. The Journal of Psychology and Financial Markets, 2(1), 37-53.Google Scholar ↗
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Hilton, D. J. (2001). The psychology of financial decision-making: Applications to trading, dealing, and investment analysis. The Journal of Psychology and Financial Markets, 2(1), 37-53.Google Scholar ↗
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Hirshleifer, D. (2008). Psychological bias as a driver of financial regulation. European financial management, 14(5), 856-874.Google Scholar ↗
Porcelli, A. J., & Delgado, M. R. (2009). Acute stress modulates risk taking in financial decision making. Psychological science, 20(3), 278-283.Google Scholar ↗
Daskalakis, N., Kokkinaki, F., Kalogeras, N., Hoffmann, A., & Chrysikopoulou, E. (2011). What drives capital structure decisions? The role of personality traits in corporate financial decision making. Behavioural Finance.Google Scholar ↗
Slovic, P. (1972). Psychological study of human judgment: Implications for investment decision making. The Journal of Finance, 27(4), 779-799.Google Scholar ↗
Baddeley, M. (2010). Herding, social influence and economic decision-making: socio-psychological and neuroscientific analyses. Philosophical Transactions of the Royal Society B: Biological Sciences, 365(1538), 281-290.Google Scholar ↗
Carr, P. B., & Steele, C. M. (2010). Stereotype threat affects financial decision making. Psychological Science, 21(10), 1411-1416.Google Scholar ↗
Schall, D. L. (2020). More than money? An empirical investigation of socio-psychological drivers of financial citizen participation in the German energy transition. Cogent Economics & Finance, 8(1), 1777813.Google Scholar ↗
Kebede, M., & Kuar, J. (2015). Financial literacy and management of personal finance: a review of recent literatures. Research Journal of Finance and Accounting, 6(13), 92-106.Google Scholar ↗
Lingyan, W., Mawenge, Rani, D., & Patil, S. (2021). Study on relationship between personal financial planning and financial literacy to stimulate economic advancement. Annals of Operations Research, 1-21.Google Scholar ↗
Obago, S. O. (2014). Effect of financial literacy on management of personal finances among employees of commercial Banks in Kenya (Doctoral dissertation).Google Scholar ↗
Janposri, P. (2021). The Role of Financial Literacy in Retirement Planning and Wealth Accumulation Among Self-employed Thai Workers. Journal of Population & Social Studies, 29(1).Google Scholar ↗
Kotzé, L., & Smit, A. (2008). Personal financial literacy and personal debt management: the potential relationship with new venture creation. The Southern African Journal of Entrepreneurship and Small Business Management, 1(1), 35-50.Google Scholar ↗
Koomson, I., Villano, R. A., & Hadley, D. (2023). The role of financial literacy in households’ asset accumulation process: Evidence from Ghana. Review of Economics of the Household, 21(2), 591614.Google Scholar ↗

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[refR-2] Capuano, A., & Ramsay, I. (2011). What causes suboptimal financial behaviour? An exploration of financial literacy, social influences and behavioural economics. An Exploration of Financial Literacy, Social Influences and Behavioural Economics (March 23, 2011). U of Melbourne Legal Studies Research Paper, (540).Google Scholar ↗

[refR-3] Raut, R. K. (2020). Past behaviour, financial literacy and investment decision-making process of individual investors. International Journal of Emerging Markets, 15(6), 1243-1263.Google Scholar ↗

[refR-4] Altman, M. (2012). Implications of behavioural economics for financial literacy and public policy.Google Scholar ↗

[refR-5] The Journal of socio-economics, 41(5), 677-690.Google Scholar ↗

[refR-6] Zaimovic, A., Torlakovic, A., Arnaut-Berilo, A., Zaimovic, T., Dedovic, L., & Nuhic Meskovic, M. (2023). Mapping financial literacy: A systematic literature review of determinants and recent trends. Sustainability, 15(12), 9358.Google Scholar ↗

[refR-7] Sharif, S. P., & Naghavi, N. (2020). Family financial socialization, financial information seeking behavior and financial literacy among youth. Asia-Pacific Journal of Business Administration, 12(2), 163-181.Google Scholar ↗

[refR-8] Pribble, J., Jarvis, D. A., & Patil, S. (2023). U.S. Patent No. 11,763,590. Washington, DC: U.S. Patent and Trademark Office.Google Scholar ↗

[refR-9] Farrell, L., Fry, T. R., & Risse, L. (2016). The significance of financial self-efficacy in explaining women’s personal finance behaviour. Journal of economic psychology, 54, 85-99.Google Scholar ↗

[refR-10] Alam, A., & Siddiqui, D. A. (2021). How financial Knowledge and personal Saving Orientation affect money management stress and financial security, Leading towards Wellbeing and positive financial behavior: the complementary Role of Materialism and Self Efficacy, mediated by the willingness to take risk. Leading towards Wellbeing and positive financial behavior: the complementary Role of Materialism and Self Efficacy, mediated by the willingness to take risk (October 14, 2021).Google Scholar ↗

[refR-11] Patil, S., Pribble, J., & Jarvis, D. A. (2023). U.S. Patent No. 11,625,933. Washington, DC: U.S. Patent and Trademark Office.Google Scholar ↗

[refR-12] Pompian, M. M. (2012). Behavioral finance and wealth management: how to build investment strategies that account for investor biases (Vol. 667). John Wiley & Sons.Google Scholar ↗

[refR-13] De Meza, D., Irlenbusch, B., & Reyniers, D. (2008). Financial capability: A behavioural economics perspective. Consumer research, 69, 192-193.Google Scholar ↗

[refR-14] Tang, N., & Baker, A. (2016). Self-esteem, financial knowledge and financial behavior. Journal of economic psychology, 54, 164-176.Google Scholar ↗

[refR-15] Drever, A. I., Odders-White, E., Kalish, C. W., Else-Quest, N. M., Hoagland, E. M., & Nelms, E. N. (2015). Foundations of financial well-being: Insights into the role of executive function, financial socialization, and experience-based learning in childhood and youth. Journal of Consumer Affairs, 49(1), 13-38.Google Scholar ↗

[refR-16] Pribble, J., Patil, S., & Neighbour, E. (2024). U.S. Patent Application No. 18/328,957.Google Scholar ↗

[refR-17] Grohmann, A., & Schoofs, A. (2021). Financial literacy and intra-household decision making: Evidence from Rwanda. Journal of African Economies, 30(3), 225-250.Google Scholar ↗

[refR-18] Van Nguyen, H., Ha, G. H., Nguyen, D. N., Doan, A. H., & Phan, H. T. (2022). Understanding financial literacy and associated factors among adult population in a low-middle income country. Heliyon, 8(6).Google Scholar ↗

[refR-19] Eniola, A. A., & Entebang, H. (2017). SME managers and financial literacy. Global Business Review, 18(3), 559-576.Google Scholar ↗

[refR-20] Pribble, J., Patil, S., & Tran, T. (2024). U.S. Patent Application No. 18/182,536.Google Scholar ↗

[refR-21] Hilton, D. J. (2001). The psychology of financial decision-making: Applications to trading, dealing, and investment analysis. The Journal of Psychology and Financial Markets, 2(1), 37-53.Google Scholar ↗

[refR-22] Hayei, A. A., & Khalid, H. (2019). Inculcating financial literacy among young adults through trust and experience. International Journal of Accounting, Finance and Business, 4(18).Google Scholar ↗

[refR-23] Willis, L. E. (2008). Against financial-literacy education. Iowa L. Rev., 94, 197.Google Scholar ↗

[refR-24] Serido, J., Shim, S., & Tang, C. (2013). A developmental model of financial capability: A framework for promoting a successful transition to adulthood. International Journal of Behavioral Development, 37(4), 287-297.Google Scholar ↗

[refR-25] Sivaramakrishnan, S., Srivastava, M., & Rastogi, A. (2017). Attitudinal factors, financial literacy, and stock market participation. International journal of bank marketing, 35(5), 818-841.Google Scholar ↗

[refR-26] Nigam, R. M., Srivastava, S., & Banwet, D. K. (2018). Behavioral mediators of financial decision making–a state-of-art literature review. Review of Behavioral Finance, 10(1), 2-41.Google Scholar ↗

[refR-27] Hilton, D. J. (2001). The psychology of financial decision-making: Applications to trading, dealing, and investment analysis. The Journal of Psychology and Financial Markets, 2(1), 37-53.Google Scholar ↗

[refR-28] Estelami, H. (2016). Cognitive drivers of suboptimal financial decisions: Implications for financial literacy campaigns. In Financial Literacy and the Limits of Financial Decision-Making (pp. 10-25). Cham: Springer International Publishing.Google Scholar ↗

[refR-29] Hirshleifer, D. (2008). Psychological bias as a driver of financial regulation. European financial management, 14(5), 856-874.Google Scholar ↗

[refR-30] Porcelli, A. J., & Delgado, M. R. (2009). Acute stress modulates risk taking in financial decision making. Psychological science, 20(3), 278-283.Google Scholar ↗

[refR-31] Daskalakis, N., Kokkinaki, F., Kalogeras, N., Hoffmann, A., & Chrysikopoulou, E. (2011). What drives capital structure decisions? The role of personality traits in corporate financial decision making. Behavioural Finance.Google Scholar ↗

[refR-32] Slovic, P. (1972). Psychological study of human judgment: Implications for investment decision making. The Journal of Finance, 27(4), 779-799.Google Scholar ↗

[refR-33] Baddeley, M. (2010). Herding, social influence and economic decision-making: socio-psychological and neuroscientific analyses. Philosophical Transactions of the Royal Society B: Biological Sciences, 365(1538), 281-290.Google Scholar ↗

[refR-34] Carr, P. B., & Steele, C. M. (2010). Stereotype threat affects financial decision making. Psychological Science, 21(10), 1411-1416.Google Scholar ↗

[refR-35] Schall, D. L. (2020). More than money? An empirical investigation of socio-psychological drivers of financial citizen participation in the German energy transition. Cogent Economics & Finance, 8(1), 1777813.Google Scholar ↗

[refR-36] Kebede, M., & Kuar, J. (2015). Financial literacy and management of personal finance: a review of recent literatures. Research Journal of Finance and Accounting, 6(13), 92-106.Google Scholar ↗

[refR-37] Lingyan, W., Mawenge, Rani, D., & Patil, S. (2021). Study on relationship between personal financial planning and financial literacy to stimulate economic advancement. Annals of Operations Research, 1-21.Google Scholar ↗

[refR-38] Obago, S. O. (2014). Effect of financial literacy on management of personal finances among employees of commercial Banks in Kenya (Doctoral dissertation).Google Scholar ↗

[refR-39] Janposri, P. (2021). The Role of Financial Literacy in Retirement Planning and Wealth Accumulation Among Self-employed Thai Workers. Journal of Population & Social Studies, 29(1).Google Scholar ↗

[refR-40] Kotzé, L., & Smit, A. (2008). Personal financial literacy and personal debt management: the potential relationship with new venture creation. The Southern African Journal of Entrepreneurship and Small Business Management, 1(1), 35-50.Google Scholar ↗

[refR-41] Koomson, I., Villano, R. A., & Hadley, D. (2023). The role of financial literacy in households’ asset accumulation process: Evidence from Ghana. Review of Economics of the Household, 21(2), 591614.Google Scholar ↗