What’s the Latest in Behavioral Finance?

Nov 04, 2014
Behavioral Finance, Research, Investing, Purchase Decisions, Chart of the Week, Video Resource

Personal finance education must incorporate an understanding of our psychology and attitudes about money.  In order to be successful, educators must close the gap between your students understanding a concept (it is good to save money) and acting upon it.  Here are a few interesting articles to get your students thinking…:

Psychological science has found out at least two things about human nature:

• We don’t always act in our own best interest.
• We’re easily manipulated.

If you take it from Harvard psychologist and “Stumbling On Happiness” author Daniel Gilbert, these tripped-up tendencies are evident in the way we make purchases.

  • Interesting research that demonstrates how people behave after being primed with the thought of money (Atlantic):

When it comes to money, people aren’t pursuing stacks of green paper or a collection of copper disks—they’re interested in what those objects represent. The pull of money, the economy and most behavioral research agree, is symbolic.

But what if the medium of exchange—cash itself—can change the way people behave? A study to be published next month in the Journal of Experimental Social Psychology points toward that possibility. Its authors found, through a series of six experiments, that people who were prompted to think about money—literally just shown a picture of bills or coins—were more likely to conceal their emotions than those who viewed non-financial imagery. This study offers only the latest addition to the list of behaviors brought on by the mere thought of money.

  • It turns out that making a lowball offer can stress not only the seller but also the buyer (Forbes):

“I would expect that people feel more stress if they make offers that are significantly less than what is perceived as fair,” says Uwe Dulleck, a professor of economics and finance at QUT’s business school and one author of the study. He points out that behavioral evidence from other studies that did not record physiological data but used higher stakes—such as large sums of money—show similar behavior. “Thus, it is likely that our findings apply to activities where large sums of money are involved,” Dulleck says. “For example, making an offer on a house.”

  • Confirmation bias is something for investors to watch out for (good exercise for students who are making a pitch for a specific stock is to provide both the bull (optimistic) and bear (pessimistic) case for the company.  Here’s why (WSJ):

“In an effort to understand why investors do what they do, the term “confirmation bias” is often trotted out. Most basically, it means that people tend to find evidence, in the form of data or anecdotes, to support their position and ignore evidence to the contrary….From a behavioral-finance perspective, the mind likes to see what it likes to see, and so it filters information,” says Steve Wood, chief market strategist at Russell Investments. “You need to expose that bias to the pressure of data.”

  • Amazing chart accompanies this story showing how retail investors have been pulling money out of the stock market since the 2008 downturn (Barrons).  Investigates behavioral issues that have kept them from coming back.  ON-BG714_JPM103_NS_20141029131752

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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