What is Financial Behavior | IGI Global (2024)

FAQs

What is the meaning of financial behavior? ›

It refers to the way a person manages their money, makes financial decisions, and deals with financial issues. Many factors influence an individual's financial behavior, including upbringing, culture, personality, education, income level, and personal experiences.

Behavioral finance helps us understand how financial decisions around things like investments, payments, risk, and personal debt, are greatly influenced by human emotion, biases, and cognitive limitations of the mind in processing and responding to information.

So, what is behavioral finance? It's an economic theory that explains often irrational financial behavior, such as overspending on credit cards or panic selling during a market downturn. People often make financial decisions based on emotions rather than rationality.

Financial attitude is a state of mind of a person about finances which is generally a resultant of his background and environment. Financial behaviour concerns with a humans action with respect to money management. We can say that both are closely related and part of the same family.

Beyond individual factors, socioeconomic factors also significantly influence financial behaviour. Income level, access to financial services, and cultural norms can all play a role in shaping financial choices and opportunities (Collins et al., 2016).

Makes and follows a budget, saves for big purchases and for retirement. Shows positive money management habits and decision-making strategies. Lives within their means, compares features and costs to make an informed purchase. Makes spending and saving decisions that match personal goals and values; resists peer ...

And in Behavioral Economics For Dummies, readers will learn how social and psychological factors, such as instinctual behavior patterns, social pressure, and mental framing, can dramatically affect our day-to-day decision-making and financial choices.

Benefits of behavioral finance

This may help individuals make better choices regarding their financials, which often positively impacts the economic market. Additionally, behavioral finance shows investors ways to overcome negative bias in their financial decision-making.

The former, during the money management, rely on the rationality, while the latter — on the irrationality. In turn, behavioral finance is an interdisciplinary subject based on theories and methods of research from a wide range of decision-making areas, such as psychology, sociology, and finance.

Key Takeaways

Behavioral finance combines psychology and economics to study financial decision-making. It challenges the traditional view that people are rational market actors. Real-world examples include overconfidence, loss aversion, and herd behavior. Understanding these biases can improve investment strategies.

What are the two pillars of behavioural finance? ›

And yet, there is no dearth of investors making irrational decisions. Clearly, something else is at play here – cognitive bias and limits to arbitrage. These are the two pillars of behavioural finance. Both offer answers to how emotions and biases affect share prices and financial markets.

Behavioral finance consists of three themes: (1) heuristic‐driven bias; (2) frame dependence; and (3) inefficient markets.

Research from SAM's LifeValues Quiz identifies four categories of values that drive financial behaviors: inner values, social values, physical values and financial values.

Financial Behavior is. the level of an individual or household's ability to manage. financial resources including the planning to earn money, managing and controlling finances, and practices related to. cash and credit management [4].

Financial behavior is also defined as how good a household or individual manages financial resources that include savings budget planning, insurance and investment. A person's financial behavior can be seen from how good he manages cash, debt, savings and other expenses.

Or defined even more broadly: responsible financial behavior is maximizing lifetime utility, based on trade-offs between education and work, work and leisure, owning or renting a home, spending and saving, and financial assets.

Your financial personality reflects traits and attitudes, such as whether you pay your bills on time, or how you feel about the future.

All these features can be accessed easily when someone uses a digital bank. All the benefits above can make someone have financial management behavior. Financial management behavior is a person's ability to organize, plan, budget, check, manage, control, seek and save funds for daily needs (Azib et al., 2021).