Kim Davis, PhD, NCC, AFCAssistant Professor of Consumer Science
Texas State University @ San Marcos
Individuals and families Banking and finance companies Government agencies Grass‐roots consumer and community
interest groups Universities and schools
For consumers to effectively use the broad spectrum of financial products and tools to effectively manage personal finances◦ Cash flow management◦ Appropriate selection of financial products◦ Consumer protection◦ Pervasive and influences everyone—gender, race,
age, socioeconomic lines
Defining what we are “all” talking about!◦ What is financial literacy? Financial education?
No national standard Core content or competencies Assessment of success or behavioral change No standards for educators teaching personal
finance(Hira & Schuchardt, 2008)
Defining what we are “all” talking about!◦ Numerous perspectives of personal finance
Economics Sociology Psychology Adult learning
Family and Consumer Sciences Research Journal
Financial Services Review Journal of Consumer Affairs Journal of Family and Economic
Issues Journal of Financial Counseling and
Planning Education Journal of Financial Planning Journal of Personal Finance
Social Exchange Theory (Homans, 1958) Adult Learning Theory (Mezirow, 1981) Human Ecological Model (Bronfrenbrenner, 1979) Family Management System (Deacon & Firebaugh,
1988) Lifecycle Hypothesis of Savings (Ando & Modigliani,
1963) Behavioral Lifecycle Hypothesis Theory of Reasoned
Action and Theory of Planned Behavior (Thaler & Shefrin, 1981)
Transtheoretical Model of Change (Nickols, 2008)
Effectiveness of Financial Education◦ Adults participating in education programs are
more likely to use a formal spending plan. Sample of U.S. military personnel
◦ Participants in high school financial education are more likely to: Have a savings account and save regularly, Pay fewer bank fees Read money management articles Pay off credit card balances
◦ Indicates positive behavioral change(Bell, Gorin & Hogarth,
2009)
Effectiveness of Financial Education (cont.)◦ Savings behaviors of people in states with a
literacy mandate show no difference in savings rates from before the mandate to after. U.S. Census data
◦ Indicates positive behavioral change
(Cole & Shastry, 2009)
Effectiveness of Financial Education (cont.)◦ States with high school financial education tend to
see saves at higher rates. Sample is unclear Instrument designed by researchers for unrelated
purpose◦ Indicates positive behavioral change
(Bernheim, Garrett & Maki, 2001)
Effectiveness of Financial Education (cont.)◦ Studied impact of high school financial planning
curriculum on behavior, knowledge, and self-efficacy National sample of teens using the curriculum Immediately prior and 3 months out from exposure
◦ Significant changes in: Behavior Knowledge Self-efficacy
◦ Indicates positive behavioral change and knowledge
(Danes, Huddleston-Casas, & Boyce, 1999)
Effectiveness of Financial Education (cont.)◦Jump$tart Coalition for
Personal Financial Literacy
(Mandell & Klien, 2009)
Year 1998 2000 2002 2004 2006 2008
% Passing
57.3 51.9 50.2 52.3 52.4 48.3
Sample Size
1532 723 4024 4074 5775 6856
◦College 2008 administration of the same instrument proved more promising Average score was 62.2%, sample size of 1080 Nearly 15 percentage points above the 48.3%
average of high school seniors
(Mandell & Klien, 2009)
Current thought and theory◦ Promise of Consumer Sovereignty
Welfare-enhancing choices can be taught(Willis, 2008)
Comparison◦ Sex education◦ Alcohol and drug prevention education◦ Health and wellness education
Behavioral financeBeginning Researchers
Amos Tversky (1937-1996)Taught at Stanford UniversityPsychologist
Daniel Kahneman (1934)Teaches at Princeton UniversityPsychologist
Richard H. Thaler (1945)University of ChicagoBusiness Finance
Works attempt to explain irrational human economic choices.
Behavioral finance• Every financial decision should result from a
rational calculation of its effect on our overall wealth.
Behavioral financePrinciple Anchoring
Explanation Clinging to a reference point (fact or figure) which should have no bearing on one's judgment or decision; knowing the logical relevance to the decision at hand
Example(s) • Fixed on a figure when selling, even when the value has increased or dropped
• Brand loyalty• We are biased to information that confirms our
beliefs
Remedy • Look for information that contradicts your beliefs• No substitute for rigorous critical thinking• Get second opinions• Disregard acquisition value when selling• Don’t be swayed by list prices (make an offer)
Behavioral financePrinciple Mental Accounting
Explanation Valuing some dollars less than others and more readily wasting them; separating money into accounts based on a variety of subjective criteria such as source, storage and purpose
Example(s) • Spending “gifted” or “found” money more readily• Gifts or tax returns• Spending more readily when using plastic• Burying small purchases into larger ones (e.g. new
car extras, upgrades on a new home, extended warranties)
Remedy • Deposit “gifted” or “found” money into a savings account before spending • Convert the amount of the expense into $/hour cost• Break down large purchase into its parts and
question the extras• Pay with cash instead of plastic
Behavioral finance
Principle Hindsight or Confirmation Bias
Explanation Encountering a situation with a preconceived opinion
Example(s) •A person believes that some past event was completely predictable•Someone is more likely to look for information that supports the original idea rather than seek out information that will contradict it•One-sided information skews frame of reference
Remedy • Find a dissenting voice of reason
Behavioral financePrinciple Innumeracy
Explanation Ignorance of the importance of key mathematical concepts in making sound financial decisions
Example(s) • Inflation - choosing conservative investments and becoming more vulnerable to inflation•Probability - being insurance poor•Bigness bias – neglecting small numbers that make a big difference over time (e.g. regular checking verses savings or investing)
Remedy • Invest or save regularly and for the long term•Raise insurance deductibles•Pick up spare change dropped
Behavioral finance
Principle Gambler’s Fallacy – Related to Innumeracy
Explanation Erroneous belief that the onset of a random event is likely to happen again while past events do not change probability
Example(s) •Believing that every losing pull of a slot machine arm puts a person one pull closer to a win
Remedy •Understand that in the case of independent events, the odds of a specific outcome on the next chance is exactly the same
Behavioral finance
Principle Herd Instinct or "Heard It Through the Grapevine"
Explanation Conforming to the behavior of others; mimicking the actions (rational or irrational) of a group
Example(s) •Buying because others are buying, or selling because others are selling•Acting on tips•Conforming because of social pressure•Believing a large group couldn’t be wrong
Remedy •Avoid the "hot" thing or fad•“Tune out the noise” – disregard most financial news•Be a long-term value investor
Behavioral financePrinciple Over-confidence / Over-optimism
Explanation “You’re probably not as smart as you think you are.” Tendency to over-estimate one's abilities, knowledge and skills
Example(s) •Too optimistic about when you will implement strategies•Think you are in better shape than you are•Assign success to "skill" and failure to "bad luck"
Remedy •Get a second opinion•Add 25% to anything you do (time or money)•Keep in mind that fund managers with the best information available still miss the mark in achieving good returns
Behavioral finance
Principle Loss Aversion or Sunk Cost Fallacy
Explanation People feel twice as strongly about the pain that comes from a loss than the pleasure that comes with an equal gain•Inability to forget money already spent makes us too ready to throw good money after bad
Example(s) • Holding on to losers, and selling a winner• Failing to realize that it’s not what “things” were
worth in the past that’s important, but how much they’re worth now.• Keeping expensive shoes that don’t fit
Remedy • Forget the past – evaluate the future• Remember: Someone else might benefit from
your loss.
Behavioral finance
Principle Decision Paralysis
Explanation Having a preference for the status quo; avoiding changing or making proactive decisions
Example(s) •Staying in a low-paying job when a better one could be obtained•Leaving money in a bank rather than investing•Neglecting refinancing a mortgage when interest rates drop
Remedy •ACT•Autopilot your investments through direct deposit
Behavioral financePrinciple Endowment Effect
Explanation Tendency to fall in love with what one owns; over-valuing what belongs to an individual relative to the value he or she would place on the same possession or circumstance if it belonged to someone else; tendency to place an inordinately high value on what is "mine"
Example(s) • It is broken, will not work but belonged to your great, great grandmother•Memories •Tend to focus on the positive qualities of the options under consideration
Remedy •Remember you will make new memories
Sound pedagogy in general◦ Self-Efficacy Theory
Belief that one is capable of performing in a certain manner to attain certain goals Focusing on one's assessment of his/her abilities to
perform specific tasks in relation to goals and standards rather than in comparison with others’ capabilities. Additionally, it builds on personal past experiences of mastery.
Sound pedagogy in general◦ Social Learning Theory
Ecological model for behavior change Focuses attention on both individual and social
environmental factors as targets for interventions Directed at changing …
interpersonal,
organizational, community, and public policy
The theory assumes that appropriate changes in the social environment will produce changes in individuals
Support of individuals in the population is essential for implementing environmental changes
Characteristics of the educator◦ Ability to connect to audience◦ Enthusiasm◦ Knowledge of content◦ Active teaching (demonstrates relevance)◦ Pace of instruction◦ Clear communication◦ Questions effectively◦ High expectations