Psychology, Financial Decision Making and Financial Crises
Excerpts (via Tommy Gärling, Erich Kirchler, Alan Lewis, and Fred van Raaij)
How could the current financial crisis have happened? While fingers have been pointing to greedy banks, subprime-loan officers, and sloppy credit card practices, these are not the only contributors to the economic downturn. A new report examines the psychology of financial decisionmaking, including the role of risk in making economic choices, how individuals behave in stock and credit markets, and how financial crisesimpact people’s well-being.
Financial crises take a large toll not just on people’s wallets, but also on their behavior. Consumer confidence affects spending and saving. Individuals cope with financial crises in a number of ways, for example by shopping in cheaper stores and eating out less. Making lifestyle changes (e.g., selling the car, making their own clothing) is very difficult for most people and is often a last resort to dealing with economic troubles–these changes clearly signal to themselves and others that they are struggling financially.