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Über dieses Buch

Government policies, marketing campaigns of banks, insurance companies and other financial institutions, and consumers' protective actions all depend on assumptions about consumer financial behavior. Unfortunately, many consumers have no or little knowledge of budgeting, financial products, and financial planning. It is therefore important that organizations and market authorities know why consumers spend, borrow, insure, invest, and save for their retirement - or why they do not. Understanding Consumer Financial Behavior provides a systemic economic and behavioral approach to the way people handle their finances. It discusses the different types of financial behaviors consumers may engage in and explores the psychological explanations for their behavior and choices. This exciting new book is essential reading for scholars of marketing, finance, and management; financial professionals; and consumer policy makers.




1. Introduction

In economic theory, the “homo economicus,” with his/her rational decision-making, stable preferences, egocentrism, and maximizing utility, used to be the economic model of man. In Simon’s (1957, p. xxiii) words: “Economic Man has a complete and consistent system of preferences that allows him/her always to choose among the alternatives open to him/her. He/she is always completely aware of what these alternatives are. There are no limits on the complexity of the computations he/she can perform in order to determine which alternatives are best.” Becker (1976) outlined rational choice theory and applied this to domains outside traditional economics, from crime to marriage (Becker, 1981), and obviously also financial behavior. Becker believed that psychologists and sociologists could learn from the “rational man” assumption advocated by neoclassical economists. He did not assume that consumers actually use economic models and trade-offs to select a marriage partner or make a financial decision (descriptive validity), but he assumed that economic models are able to predict outcomes of human decision processes (predictive validity).
W. Fred van Raaij

Part I


2. Money Management

The basis of financial behavior is how people manage their money in daily transactions and payments, and how people try to “make ends meet” by mental accounting and budgeting their expenses. Financial planning and decision-making about (complex) financial products are also part of money management. Will money “buy” happiness and well-being or are other factors more important? This chapter can be read in combination with chapters 10 (responsible financial behavior), 11 (individual differences and segmentation), 12 (confidence and trust), and 17 (self-regulation).
W. Fred van Raaij

3. Saving Behavior

This chapter is on saving behavior and its determinants and consequences. Consumers save for a financial buffer, for specific transactions, for “rainy days,” for their children, and for their retirement. Future-time preference and self-control are needed to refrain from immediate spending and to save money for “later.” This chapter can be read in combination with chapters 11 (individual differences and segmentation), 12 (confidence and trust), 15 (time preference), and 17 (self-regulation).
W. Fred van Raaij

4. Credit Behavior and Debt Problems

Credit is an attractive way to buy now rather than buying after saving. The downside of credit is that consumers may become overin-debted on their credit cards and personal loans. Impulsive behavior, present bias, and lack of overview and self-control are psychological factors explaining why some people misuse credit and get into financial problems. This chapter can be read in combination with chapters 11 (individual differences and segmentation), 12 (confidence and trust), 15 (time preference), and 17 (self-regulation).
W. Fred van Raaij

5. Insurance and Prevention Behavior

Insurance and prevention behavior constitute protection against potential financial losses. People may be under- or overinsured, not knowing the coverage of their insurance policies. Important home insurance against natural disasters is often lacking, whereas less relevant insurances such as product warranty extensions have been bought. Moral hazard relates to misuse of insurance by customers, visiting the doctor too often, or overclaiming losses. This chapter can be read in combination with chapters 12 (confidence and trust), 13 (loss aversion and reference points), 14 (risk preference), 15 (time preference), and 17 (self-regulation).
W. Fred van Raaij

6. Pension Plans and Retirement Provisions

Most people agree that pension plans and retirement provisions are of crucial importance to them, but nevertheless they do not spend much time on this topic and do not save enough for their retirement. This may be due to their time preference, especially present bias, because retirement is far away in the future. Causes and effects of postponement of retirement saving are discussed. The main question is how this can be improved in the consumers’ and societal interest. This chapter can be read in combination with chapters 12 (confidence and trust), 15 (time preference), and 17 (self-regulation).
W. Fred van Raaij

7. Investment Behavior

Investment behavior is based on uncertainty about the future and is thus risky. News and rumors and speed and availability of information play important roles in investment markets. Risk propensity, risk preference, and attitude are the major concepts and explanations of investment behavior. Investors employ biases and heuristics in their decisions to invest or not, and how much to invest. Herding is another factor: people tend to imitate and follow other investors, probably due to lack of relevant and reliable information and lack of courage to behave differently. This chapter can be read in combination with chapters 11 (individual differences and segmentation), 12 (confidence and trust), 13 (loss aversion), 14 (risk preference), and 15 (time preference).
W. Fred van Raaij

8. Tax Behavior: Compliance and Evasion

Tax behavior, both compliance and evasion, are important for taxpayers and the tax authority. Paying taxes is not popular for most people. Traditionally, taxpayers and the tax authority play the “cops and robbers” power game of distrust, policing, and control. A modern approach is the “clients and services” approach with more trust between parties. The tax authority may provide pre-filled-out tax declarations and other services to taxpayers. Equity, fairness, and justice are important drivers of trust and tax compliance. This chapter can be read in combination with chapters 12 (confidence and trust), 13 (loss aversion and reference points), and 14 (risk preference).
W. Fred van Raaij

9. Victims of Financial Fraud

In this chapter, the tactics of fraudsters and reactions of potential and actual fraud victims are described. Unfortunately, fraud is a pervasive phenomenon and many people will become victims of financial fraud during their life, for instance, pyramid games and other investment fraud. Internet fraud such as phishing is growing and is becoming more sophisticated and more difficult to stay away from. This chapter can be read in combination with chapters 12 (confidence and trust), 13 (loss aversion and reference points), and 14 (risk preference).
W. Fred van Raaij

10. Responsible Financial Behavior

This is a key chapter. Understanding consumer financial behavior is a prerequisite for helping consumers to make better financial decisions. Most people have low financial literacy (knowledge and skills) levels, and this is a cause of many mistakes and lack of appropriate actions, for instance, saving enough for retirement. Financial education may be a solution, but other ways to get around the financial illiteracy problem of consumers involve financial planning and advice. The objective is responsible financial behavior with happiness, peace of mind, and well-being as desirable consequences. This chapter can be read in combination with chapters 11 (individual differences and segmentation), 12 (confidence and trust), 13 (loss aversion and reference points), 14 (risk preference), 15 (time preference), 16 (decision-making), and 17 (self-regulation).
W. Fred van Raaij

Part II


11. Individual Differences and Segmentation

Economists prefer relationships at the aggregate level; psychologists usually focus on the individual level. Relations at the aggregate level may be misleading if segments exist of people with different behavior. This chapter is about how people differ in their sociodemographic variables and other factors related to financial behavior. Personality is one of the factors explaining differences in financial behavior. The Big Five of personality factors is discussed here. Especially relevant for financial behavior are: conscientiousness and openness to experience. Consumers may be segmented into homogeneous segments or cohorts. Different policies can effectively be applied to members of different segments.
W. Fred van Raaij

12. Confidence and Trust

Confidence and trust are crucial for the functioning of the economy. Spending, saving, borrowing, investing, all depend on the confidence consumers have in the future economy, their personal finances, and on the trust they have in financial institutions such as banks, insurance and credit-card companies, investment and pension funds. Trust is also needed because the quality of many financial services cannot be inspected at purchase, but may become apparent years later. Without trust, transaction partners and society as a whole have to resort to legal enforcement of contracts, and this is a second-best alternative.
W. Fred van Raaij

13. Loss Aversion and Reference Points

Comparisons and perceptions of gains and losses are judged from an individual or social reference point. Gains and losses have a different emotional impact. A loss has a much stronger negative impact than an equivalent gain has a positive impact. People take more risk to avert a loss than to reach a gain. The value function of prospect theory explains these differences and the motivational effects of comparisons, gains, and losses in financial behavior. Hedonic framing is strategic aggregation of segregation of gains and losses to ameliorate the outcome.
W. Fred van Raaij

14. Risk Preference

Many financial decisions are related to risk. Risk preference is not only an important concept for investment behavior ( chapter 7 ), but also for consumer credit ( chapter 4 ), insurance ( chapter 5 ), pension plans ( chapter 6 ), tax behavior ( chapter 8 ), and becoming a victim of fraud ( chapter 9 ). Risk is experienced by most people as the likelihood of loss. In most cases, risk cannot be established objectively but is perceived risk, depending on people’s interpretation of risk-relevant information. People differ in their risk preference and risk taking, based on personal characteristics and situational factors such as framing.
W. Fred van Raaij

15. Time Preference

Time preference is another basic concept in financial behavior, because many financial contracts such as mortgages, life insurance, and pension plans have a duration of 20–40 years. Saving and investing are financial behaviors directed toward the future. Some people are more present-time and others more future-time oriented. Time preference is the preference for spending now (present bias) or for saving for future spending (chapter 3) and for retirement (chapter 6). Time preference is also relevant for buying insurance (chapter 5) and for buying and selling stock (chapter 7). Future-time preference and procrastination (postponing tasks such as retirement saving) are related to self-regulation (chapter 17).
W. Fred van Raaij

16. Decision-Making, Decision Architecture, and Defaults

This chapter is on the presentation of information to consumers, and how this affects their decision-making and choice. There are several effects of information presentation on decision-making and choice. Important factors in decision-making are: problem, person, information supply, decision process, and social context. Defaults and nudges are designs of information presentation to influence financial and other behavior into a direction that is “desirable” for the person involved and for society.
W. Fred van Raaij

17. Self-Regulation

This is another key chapter, just as chapter 10. Self-regulation is a basic concept for financial behavior. Self-control and self-efficacy are required to perform the continuous process of self-regulation. Self-control is adhering to executing financial plans, intentions, and commitments. Self-efficacy is the competence of executing courses of action required to deal with prospective situations. Are people able to control and regulate themselves not to be impulsive, not to spend too much, save enough, also for retirement, avoid problematic debt, insure their possessions and risks, pay their taxes on time, and not become a victim of financial fraud? Delay of gratification, lack of willpower, and lack of self-control are the major psychological obstacles for successful self-regulation. Formulated in positive terms: do people select the right financial and life goals, and are people consistent and persistent in their goal achievement, and resistent to temptations?
W. Fred van Raaij


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