The subject of household finance has grown into an acute area of economic focus, in recent decades. As household portfolios have become more sophisticated, researchers have become more interested in new financial challenges.
Financial decision making is difficult. It is basically in tandem with uncertainty about future. It is dependent on future income, liquidity and interest rates. There is a lot to discuss in this field. Since it is highly twisted with the daily life and also important for ordinary people, even though they may not have the related academic knowledge.
According to the evidence, it is revealed that there are systematic biases in making a decision. Which are systematic departures from what persons aim to do and what they actually do. It can be said that poor people are basically faced with deeper consequences of biases in financial decision making. Since they are on the edge of poverty and can’t handle the margin of error. People are more careful in this field, but due to the complexity of the nature of this decision making, they may get lost and hazy. On the other hand, poverty also boosts uncertainty related to the future life by increasing people’s attention on the budget constraint and scarcity.
According to a broad range of studies, people use to interpret the results of financial outlooks in terms of gains and losses. They normally put more weight on potential losses than on gains. People are basically risk averse and invest little in risky assets and in some cases they own no risky investments at all. These kinds of financial decisions result in economic issues. For more illustration, evidence from six Latin American countries shows that the attitude to overvalue losses and undervalue gains may result in considerable welfare losses.
Bearing in mind these considerations, only establishing institutions may not be effective enough to progress individuals’ decisions. In particular, developing countries need more accurate policies to affect behavioral financial decision making. In this regard, it is so beneficial to investigate ways that make institutions more responsive to the behavioral factors of people’s financial decisions and also appropriate ways to design and implement policy goals like increasing savings. Specifically, considering different examples of interventions that have helped behavioral constraints on financial decisions, would be helpful.
The evidence displays that psychologically realization of decision making can help policy makers improve the accordance between intended and real outcomes of a policy and also help persons attain their financial goals.
Generally, policies that enhance risk tolerance and decrease investment aberration are useful. In this regard, policies would better include different items like changing default choices or simplifying financial education.
As household finance and related biases have been recently heated debates for researchers, authorities and a lot of people, what can be done to make an improvement in this field?