Behavioural Economics in Financial Decision-Making

Abstract

Besides rational calculations and data from the market, psychological, emotional and social factors also factor into financial decision making. This research paper is entitled “Behavioural Economics in Financial Decision Making”, which is about the ‘Behaviour’ of human beings including their cognitive biases, emotions, perception etc in taking financial decisions. It delves into the impact of “behavioural factors” on saving and investing, borrowing and spending, including overconfidence, loss aversion, herd behaviour, anchoring, mental accounting and present bias. The research also provides insights into the impact of these behavioral inclinations on risk assessment, investment choices, and handling uncertainty in financial scenarios. The paper uses psychology to explain economics concepts and provides insight into why individuals may make sub-optimal decisions and the critical role these sub-optimal decisions can have on the personal and financial outcome. It also reflects the importance of financial literacy, behavioural awareness and suitable decision-making process for enhancing financial management. The importance of applying the lens of behavioural economics to make sound financial choices and the potential for developing relevant financial institutional and policy interventions based on consumer behaviour are highlighted. In general, the paper highlights the role of behavioural economics to understanding the complexities of financial decisions in an ever-changing financial landscape.