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Economic Psychology
Ranyard, Rob – Economic Psychology
(2017)

Dell XPS

Table of Contents:
CHAPTER 1
...
2
CHAPTER 7 The Psychological Meaning of Money
...
13
CHAPTER 13 Saving Behavior: Economic and Psychological Approaches
...
36
CHAPTER 15 Behavior in the Financial Market
...
50
CHAPTER 19 The Economic Psychology of Gambling
...
63

1

CHAPTER 1
-

The late 19th century marked the beginning of psychology

Mainstream assumptions: The Homoeconomicus Model
1
...
Perfect rationality
3
...
Stable preferences
-

The discipline was born of an interaction between psychologists Daniel Kahneman and
Amos Tversky and the economist Richard Thaler in the 1970s
...


-

In 1947, Herbert Simon found that businesspeople did not seek to maximize their profits,
rather they set target levels above which they would be satisfied with
...


-

The main difference between behavioral economics and economic psychology is their
ontological and epistemological assumptions and the research ethics of their parent
disciplines
...


-

However, in life we aren’t given the probabilities so calculating EV makes little sense
...


-

The economists believed that humans are rational beings
...


-

When individuals make decisions, their rationality is limited, and they tend to take
shortcuts and reach a satisfying decision
...


Prospect Theory
-

The theory distinguishes two
phases

of

decision-making:

1
...

value

Editing

function

is

defined over gains and losses
relative to some reference
point, shows diminishing sensitivity in both gains and losses, and is steeper for losses
than for gains
...
Evaluation Phase: the prospect with the highest evaluation is chosen
...


-

Diminishing sensitivity is a general feature of evaluative process, reflecting the basic
psychophysical principle that the difference between $1 and $2 seems bigger than the
difference between $101 and $102
...
This reflects loss
aversion: for identical amounts, the reaction to losses is stronger than the reaction to gains
...


-

Rather, valuation can be a consequence of simple comparisons, as in the priority heuristic
...


-

Direct comparison, rather than value, is fundamental to choice
...


-

The heuristics-and-biases programme deploys the intuition that people do not integrate all
available information but use simple rules to navigate the vast amount of information
available in the world

Hot Decisions:
-

The relationship between affect and decision-making is bilateral
...
(example: economists have reported a positive correlation
between the amount of sunshine and stock market performance

-

Emotional influences on the content of thought (example: when fear induction leads to
increased risk perception)

-

Emotional influences on the depth of thought (example: when negative mood leads to
systematic processing while positive mood leads to heuristic processing)

Predicted Emotions
-

The positive or negative outcome of a decision can profoundly affect the decision-maker’s
feelings after a decision
...
Positive emotions broaden an individual’s action repertory (example: play,
explore, savor), since no specific action is called for from experiencing a positive emotion:
from feeling good, no specific action follows
...


Decisions from Experience
-

People do not usually follow SEU, while animals do
...


-

One such abstraction is to describe probabilities and payoffs to human participants in terms
of summary measures rather than having them find out about the different outcomes of
choice alternatives by repeatedly sampling them
...


-

In decisions from experience, the reverse pattern has been found
...
Thus, risk is not calculated, but felt -as an immediate
visceral reaction (fear, anxiety, dread)

-

Feelings such as fear, worry or anxiety can result when people evaluate risky alternatives
at a cognitive level
...


-

The affect heuristic proposes that the representations of choice situations in people’s minds
are tagged to varying degrees with affect
...
; affect may serve as a cue for many
important judgments
...
It is the equivalent of going with your gut
...
People
become more optimistic when they’re in a good mood
...


-

In this tradition, heuristics are defined in a stringent and testable manner consisting of
Three rules:
(1)a search rule (defining how search unfolds)
(2)a stopping rule (defining when the search stops)
(3)a decision rule (defining how a final decision is made)

-

Simon: the rationality of a choice not only depends on internal criteria (e
...
, following
the axioms) but also on the structure of the environment
...

Valuation by calculation is a process that relies on some sort of algorithm that takes into
account the nature of the stimulus and its scope
...


-

The idea is that when people rely on valuation by feeling, they are sensitive to only basic
differences in scope but are largely insensitive to further variations scope
...


-

Thinking in the calculative mode can have important consequences on life
...


-

If the number of people suffering is high - as in genocide, mass famine, or other large-scale
crisis - emotions can dissipate to a degree that people become less emotionally responsive
to a large-scale as compared to a small-scale suffering
...
Such situations are called the empathy gaps
...
Intrapersonal empathy gaps: Predicting how one would feel in a different situation
2
...

(a) Hot-to-Cold empathy gaps: people who are in emotional states (hot) tend to
underestimate the extent to which their predicted preferences are under the
influence of their present emotional state
...

(b) Cold-to-hot empathy gaps: people aren’t currently effectively aroused but have to
predict their behavior in arousing situations
...


Summary:
-

Theories of economic decision-making have two solid bed-rock concepts - risk and value
...


-

It became obvious that decision-making is not a purely cognitive process
...


CHAPTER 7 The Psychological Meaning of Money
Money: Economic and Psychological perspectives
-

Money serves as - medium of exchange, a way to store wealth and value, a means of
evaluation and a method of figuring out the value of goods and services
...


-

In other words, from an economic point of view, money cannot become an end in itself
...
For example, money can
evoke positive and negative feelings, active innate proclivities and motivations,
compensate for self-esteem, and change the norms within interpersonal relations
...


-

Based on experimental research that used the technique of money priming Vohs,
Mead and Goode introduced the self-sufficiency hypothesis
...
Being self-sufficient would
mean being hesitant to allow others to involve the self in their activities
...


-

If money makes people more individualistically oriented, it should have a negative
impact on the quality of their social interactions, consisted with the self-sufficiency
hypothesis
...


-

People in a communal mode find it natural to help others, altruistic, and generous
with friendships and family relationships
...


-

Research has shown that introducing monetary payments to communal
relationships changes them into market-like exchanges or at least impairs attitudes
and behaviors that are characteristic to communal mode
...


8

-

Ma-Kellams and Blascovich: participants paid with money demonstrated worse
performance in detecting other people’s emotions than participants in a neutral
condition (without monetary payment)
...
The combination of these
assumptions implies that money affects social norms and values
...
However, if money stimulates a focus
on individual demands, it might motivate people to pursue self-interest and usurp
more than is fair
...
When people think about money, they can be driven
to engage in immoral behavior such as cheating to get more resources
...


-

On the other hand, humans benefit from engaging in fair and reciprocal trade
...
Hence, money might also evoke
notions of honesty and fairness
...
Experiments indicate that, depending on the context, the idea of
money can stimulate ethical or unethical behavior
...
Priming is defined as the unconscious activation of
social knowledge structures or mental representations related to specific ideas, objects, or
other concepts used as primes
...


-

Participants are not supposed to know that the money priming (task 1) is related to the other
tasks
...


-

Carefully designed and conducted experimentation using money priming requires choosing
an adequate method of priming and ideally, a manipulation check to ensure that the priming
was effective
...
(CO__ coal, cord, or coin)
...


-

Even subtle money primes can change people’s behavior, decisions and preferences
...


-

For ex, money primed individuals reported higher sense of self-efficacy, declared
that they felt personally stronger, and more agentic
...


-

Second, the money not only makes people feel agentic and strong but makes them
more concentrated on hard work
...


-

These findings were also true to children who had limited knowledge of money and
its economic functions
...


-

Another stream of research on the psychological consequences of money revealed
that money is strongly related to self-focus, feelings of autonomy, and freedom
...

-

When the concept of money is salient, self-related arguments are convincing likely
because money causes people to be focused on personal advancement and their own
needs rather than on the needs or benefits of others
...


-

The focus on self that is triggered by money might be so strong that it impairs the
propensity to take the perspective of others
...


-

Summon up, money is a cue to agency, hard work, goal attainment, self-focus, and
egocentrism
...


(b) Money impairs communal behaviors
-

Money allows people to acquire what they need and want while minimizing the
need to get along with others
...


-

Participants exposed to money were less likely to volunteer their time to help others
in need
...


-

Reminding people of money also affects generosity, operationalized as the
willingness to share resources with non-kin
...


-

Moreover, we found diminished generosity after exposure to money among very
young children: preschoolers reminded of money kept more stickers for themselves
instead of sharing them with another child more so than preschoolers not reminded
of money
...


-

They behaved in a less likeable and less friendly fashion when interacting with
conversation partners
...


-

Reminders of money might alter feelings of warmth and compassion towards others
and research confirms
...
Other studies showed that money cues cause individuals to view
themselves in a less relational manner, impairing their compassion and empathy
...


-

Why Are people who are reminded of money less social? One idea is that money
directly impairs interpersonal harmony and hinders communal relationships
...


-

For example, because money pyramids increase perceived agency and competence
assigned to self and to others, they reduce helpfulness not due to antisocial
tendencies, but because others are seen as being able to cope by themselves
...


(c) Money alters values, ethics and morals
-

Money facilitates trade and improves the quality of life
...
It seems therefore, that money might activate different sorts of values,
both negative and positive
...


12

-

Kouchaki et al (2013) found that money primed people expressed stronger intention
to behave in an unethical way as well as engaged in more immoral behavior
...
Two independent field studies showed
that upper-class individuals were more likely to break the law while driving
(compared to lower-class individuals)
...


-

Merely activating the concept of money increases the probability of unethical
choices and engagement in immoral acts
...


-

Young And colleagues (2013) hypothesized that clean money (freshly printed bank
notes) would activate associations with fair, reciprocating economic behavior and
the need to obey ethical norms
...


-

Results of games played in a lab revealed that people reminded of clean money
cooperated more in a prisoner’s dilemma game and divided money more fairly in a
game that involves allocating money between oneself and anonymous person than
those reminded of dirty money
...
In
contrast, those primed with dirty money were greedier and more selfish in their
choices
...
On the other hand, money stimulates thinking about social
reality in terms of fairness and positive reciprocity
...


-

Fungible: money from all sources are interchangeable
...
But
from an economist’s point of view, this is silly, because the money will go to your money
pool and maybe spent on anything
...
The concept was first introduced by Kahneman and Tversky
...


-

Large sums may be categorized as belonging to the current assets account and tend to be
saved, while smaller sums may be categorized as current income and spend more easily
...


-

Spending is much more sensitive to changes in income compared to changes in assets
...


Behavioral life-cycle model
-

People construct simplified mental representations of their economic resources using the
following three broad mental accounts
(1) Current income
-

Related to actual bank current account

-

Highest liquidity and highest MPC

(2) Current assets
-

Often linked to a bank savings account for discretionary savings

-

MPC in between the other two

(3) Future income
-

Represents anticipated future income and pension annuities

-

Associated with the lowest MPC

Mental accounts for specific financial decisions (Specific mental accounts)

14

-

Kahneman and Tversky: mental account → outcome frame set up for a consumer choice
or transaction
Key transaction: reference point from which outcomes are evaluated

-

Three levels of account: minimal, topical, and comprehensive mental accounts
...
People have a tendency to construct
topical accounts that incorporate the most relevant, but not all, aspects of the transaction
...


-

a jacket for $125 and a calculator for $15 and were informed that the calculator was on sale
for $10 at another branch of the store, a 20-minute drive away
...
However, when the problem was rephrased for a second group, with the prices of
jacket and calculator reversed (the calculator being $125 in one store and $120 in the other
and the jacket $15), only 29% were prepared to drive to the other store
...
Since the price difference and the cost of the whole
shopping trip are the same in both forms of the problem, participants representing the
discount in terms of either a minimal or comprehensive mental account would not change
their preference across the two versions
...


Income Framing (Bonuses and Rebates spent differently)
-

Income framed as a bonus have a higher marginal propensity to consume than money
framed as a rebate
...


-

Spending money is more likely from stocks sold at a gain than from stocks sold at a loss,
thus further pointing to the effect of income categorization on spending
...


-

The labelling or earmarking of income for specific expenditures to be rather common
...


-

Recent research has shown how money received as vouchers or coupons may be allocated
to different spending categories
...
In another study, when students
were given either $5 in cash or as a gift voucher, in the first case, they spent more on
everyday items, such as toothpaste, ballpoint pens, paper towels, regular notebooks, bottled
water, and tissue boxes, whereas in the second case they spent more on luxury items, such
as memorabilia, recycled notebooks, multi-colored pens, cookies, chips, and candy (Helion
& Gilovich, 2014)
...


The medium of payment: cash, debit and credit cards
-

A surprising mental accounting phenomenon is that spending has been shown to vary with
the value of the available bank notes
...


-

Plastic effect: Debit card spending less constrained than cash

Saving category
-

Earmarking money for savings was found to be quite effective among low-income families
who receive their wages in cash
...
Since borrowing
and saving usually take place at different interest rates, this behavior is considered
irrational and is known as the debt puzzle
...
One function is to simplify decisionmaking, and related to this, to apply self-control in order to spread positive outcomes across
the lifecycle
...

Simplification
-

The categorization of money and decision outcomes into mental accounts serves
the important cognitive function of simplifying aspects of the complex economic
world
...


Self-Control and Money Management
-

As second function of mental accounting is self-control imposed by the budget
constraints associated with different mental accounts
...
The application of mental accounting in managing
financial affairs has been referred to as mental budgeting
...


-

First, setting budgets for different types of expenses, which are considered binding
...

So, it may lead to overconsumption or underconsumption
...


-

Third, compensation for past expenses may take place by postponing, reducing or
cancelling future expenses within a particular budget, even if there is money left in
another budget category
...
For marketers, it is useful to know
in which budgets consumers post expenses on their product
...
In particular, it has been
found that positive events are preferred more when the outcomes are mentally
segregated, or separated, rather than integrated
...
People
value sum of separate gains more than they value an integrated gain
...


-

Likewise, negative events are preferred when the outcomes are mentally integrated
than segregated, such as all expenses pooled on one’s credit card bill, because of
the convex shape of the value function for losses
...


Buffering the Pain of Payment
-

The question is whether the pleasure of acquiring and using a new car is segregated
from, or integrated with, the pain of paying for it
...


-

If they’re coupled, then the pain of payment can be buffered by the pleasure
associated with the purchase
...


-

People are generally averse to post-payment, and borrowing for consumption in
general, partly because thoughts of payments to come ted to spoil the pleasure of
the item purchased
...
Since it has been considered to be a self-control device, it may be used
less by impatient people with low self-control resulting in impulsiveness
...

Abundance of money may decrease the need for mental accounting while the lack of it
increases the need of mental budgeting
...
Apparently, wrapped pieces of chocolate in
a box suggests a partitioning of consumption experiences, as opposed to unwrapped
chocolates, resulting in decreased chocolate consumption
...

Rajagopal and Rha (2009) found that people were more upset about a flight delay on a
business trip than a delay on a vacation trip, showing that the evaluation of time is workrelated
...
In contrast, people
who wanted to visit the bookstore for work-related purposes tended to spend the extra time
on work-related activities, such as working on a laptop
...


-

Mental accounts even have emotional ties
...


-

Although mental accounting is considered irrational in the standard economic model, it
fulfils some useful functions in everyday life
...

Nevertheless, the fundamental insight of mental accounting theory, the financial resources
are not fungible, has been consistently validated and shown to be important across many
areas of economic life
...
In
contrast, economic psychological research has proposed that money from different sources
may be integrated into one mental account or segregated into several different ones
...


-

Since the late 18th century, consumerism has become intertwined with developments in
industrialization, urbanization and mass consumption
...


-

The status quo is not an option if investors are to be attracted, profits made, and dividends
paid out
...
All these provide
impetus towards ownership of material possessions
...


Subjective and Objective Ownership
-

Psychologically, we might feel that we own something even though we have no legal
entitlement to it or even ‘own’ another person and become possessive if we believe that
someone else is taking undue interest in him or her
...
It also has psychological consequences
...


-

Endowment Effect: emotional bias to value an object higher than its market value once the
individual establishes ownership
...
(Khaneman)
...

-

Psychological and legal ownership are not the same
...
They propose that ownership
is based upon three fundamental motives or needs:
(1) to have the power to produce desired outcomes
(2) to define self-identity and communicate this identity to others
(3) to have a place where one belongs

-

Pierce et al also suggest three pathways towards a sense of psychological ownership:
(1) Having control over the target of ownership
(2) Coming to know the target
(3) Investing the self in the target

-

Greater sense of control -> better knowledge and more self-invested in it -> stronger sense
of psychological ownership

-

Self plays a key role in this account of the motives for psychological ownership and its
formation
...

(possessing your own space - sense of personal security)

-

Involvement of the self helps explain circumstances where we have legal ownership
without a corresponding sense of psychological ownership
...
On the
other hand, I might have a sense of ownership of my rented apartment if I have inhabited
it for a long time, have some sense of ownership of my rented apartment if I was able to
personalize it by decorating or had happy memories there
...


-

Belk (1998)’s ‘extended sense of self’ - the psychological significance of possessions for
personal identity and feelings of self-worth
...
Moreover, they
are instrumental in forming our identity, in affirming it and displaying it to the outside
world
...


21

-

Links between possessions and the self are formed when feelings of self-worth are attached
to objects which reflect values that are important to the self and come to symbolize
important aspects of the self
...


-

However, there are individual differences in the tendency to become attached to such
objects
...
The degree of recalled and imagined
distress at participants’ loss of possessions was predicted by the strength of the self–
possession link and this in turn was predicted by the degree of match between object
domain and self-worth domain
...
They proposed that possessions enhance the self and
individuals seek to increase the value of their possessions in order to counter threats to the
self, particularly threats of social rejection, and that this effect is more pronounced in
selling than in buying since the self–possessions link is more salient in the case of selling
...


-

The self is also prominent in attempts to distinguish psychological ownership from legal
or objective ownership of possessions
...


Psychological aspects of materialism
-

Materialism: The self is also prominent in attempts to distinguish psychological ownership
from legal or objective ownership of possessions
...
(Belk 1984)

-

The importance a consumer attaches to worldly possessions
...

-

This definition refers to individual differences and there is disagreement as to whether these
differences should be construed as variation in fundamental personality traits, or in values
or beliefs
...


-

According to Richins and Dawson (1992), this value comprises three dimensions, namely,
(1) the centrality of material possessions and wealth in a person’s life; (2) the belief that
acquisition of material goods and wealth is essential for happiness; and (3) beliefs that
possessions enable judgements to be made about the success of the self and others
...


-

Schwartz (1992) produced the Schwartz Value Survey
...
He produced a circumplex measure of ten value
priorities, where values that are more compatible are located more closely together on the
circle whereas values that are opposed are located opposite one another on the circle
...


-

Kasser and Ryan (1993) produced the Aspiration Index, a 21-item self-report scale where
participants rate the importance to them and the likelihood of their achieving goals in the
domains of self-acceptance, affiliation, community feeling and financial success
...
MVS, SVS and
AI have all been extensively used in research
...


23

-

Materialism can be caused by people’s occupational choice and the values of the people
we encounter in and through our work will also reinforce our values (Two medical
students’ scenario)

-

Belk (1984) has argued for the traits of possessiveness, lack of generosity, and tendency to
envy others, traits which are presumably not restricted to money or material success but
apply more broadly
...


-

The correlations between materialism and psychological well-being suggest that
personality characteristics such as low self-esteem may predispose people to materialism
rather than being consequences of materialist values
...


Materialism and Subjective Well-Being
-

At the individual level: two hypotheses

(1) Materialism is negatively correlated with well-being; the more materialistic you are, the
less content you will be
...

(2) Materialist values can be beneficial
...
Being insufficiently materialistic is surely also a disadvantage
for effective social functioning in a materialist society
...
The
relationship between materialism and well-being is correlational in nature
...
Effect
sizes are larger when broader measures of materialist beliefs and values are involved and
smaller when measures refer more specifically to the desire for money and financial
success
...
On the other hand, effect size was
independent of level of GDP, whether a society was free market rather than regulated or
had higher mean materialist cultural values
...


-

Finally, although materialism was negatively associated with the entire range of measures
of well-being, three measures with larger than average effect sizes were compulsive
buying, engagement in physical risk-taking such as smoking and alcohol consumption, and
negative self-appraisal
...
Similar trends were
apparent in the United States and other capitalist economies
...
Are levels of materialism related to
socio-economic conditions of the societies and, if so, which conditions are most relevant?

-

While Kasser, Cohn, Kanner and Ryan (2007) blamed consumerism and capitalist culture
for undermined autonomy, benevolence and self-worth, Easterlin (2007) argued that
economic growth rather than consumerism is the principal factor responsible for the
adverse consequences of materialism
...

Within generations, social comparison processes increase feelings of self-dissatisfaction
while encouraging the belief that satisfaction can be achieved through the attainment of
material goals
...


25

-

Kasser et al (2014) examined materialism and well-being in Iceland which suffered
severely from the international banking crisis in 2008
...


-

Levels of materialism vary across countries (although there is no consensus on what the
critical factors are) and Kasser’s study on Iceland suggests that average levels of
materialism within a society are sensitive even in the short term to large-scale economic
changes
...
Yet there is no evidence that the link
between materialism and well-being is determined by these factors
...
For example,
government reports remain silent on how dominant values of materialism are consistent
with well-being
...


-

These values also have to be understood in terms of what others consume - that is, with
reference to some group with which we compare ourselves - and where we stand with
regard to this comparison: how materialism fits into our other values and what its
implications are for our sense of self-worth
...


-

Individuals with larger income are, on average, happier than those with smaller incomes
...
They tend to believe that they will be happier in
the future than they currently are and that they were less happy in the past, in apparent
contradiction of findings that happiness overall remains constant
...


26

-

How can this apparently puzzling pattern of results be explained? Layard (2011)
emphasizes social comparison processes; we take material success to be an indicator of
worth in the eyes of others and compare our success with what we perceive to be that of
our peers
...


-

Easterlin (2001) proposed that happiness is influenced by both income and material
aspirations and that aspirations increase in proportion to income
...
Similarly, prospective happiness is influenced by current aspirations
and we fail to take into account that our future aspirations will rise in line with our
anticipated future income
...


-

Carter and McBride (2013) obtained evidence for the hypotheses that social comparison
processes and expected outcomes influence the reference point which we use to judge gains
and losses in experienced utility: our satisfaction reflects the outcomes that reference
groups obtain alongside our own experiences
...
Aspirations, which have to be taken into account alongside actual
wealth when predicting happiness, are prominent in explanations in both fields of enquiry
...


-

In both areas of research – materialist values and income – self-comparison with relevant
reference groups influences subjective well-being
...
It is an indication of
social status, as is the capacity to acquire the kinds of possessions that are likely to be
envied
...
Material possessions
help define personal identity and communicate this identity to others; they indicate status,
wealth and taste
...


-

Furthermore, higher levels of materialism are associated with lower psychological wellbeing
...


-

Income is also related to well-being in that greater income does not necessarily produce
greater happiness
...


CHAPTER 13 Saving Behavior: Economic and Psychological
Approaches
-

After WW2, people have become able to postpone expenditures and save
...
More expenditure →
economic boom, postponed expenditure → economic recession
...


-

Savings: a stock variable and refers to the net worth of a person’s assets at a particular
moment in time

-

Saving ratio: the part of income that is saved during a period and gives a relative measure
of saving
...

(b) Contractual saving: often a result of previous decisions, such as buying goods and
services on credit
...
It is accidental saving
...
Their aim is often to
make predictions about behavior that are as good as possible, rather than identifying the
real underlying causes for why people act as they do;

-

While the (economic) psychologists often focus on the active decisions to save or on saving
intentions
...
Hence, psychologists use explanatory variables and methods in their
analyses of saving behavior that
are different from those that
economists use
...

-

Conversely, economists study
saving behavior by constructing
a model of the behavior under
investigation, often based on a
number

of

simplifying

assumptions
...
)

Economic Perspectives
-

Time preference: A person's time preference expresses his/her impatience to increase
consumption in the present period
...
The core of the “Theory of
time preference’ by Fisher and Böhm-Bawerk, is the trade-off between spending and
investing or between immediate enjoyment and possible greater deferred enjoyments
...
People with longer time horizons, longer life expectancy, high
self-control and habits of saving to have a low time preference
...

-

Ritzema (1992) found that time preference is significantly related to the likelihood of
financial problems and total debt
...


-

Chabris et al (2008) found no significant association between a person’s time preference
and his or her saving ratio
...
The implication would be that, for example, we are as impatient
for furniture as we are for food – that our sofa time preference is the same as our banana
time preference
...


Income and the Lifecycle
-

Many studies of saving show that household saving is strongly related to household
income
...
His hypothesis is based on the idea that psychological traits and
saving motives vary between individuals; however, when examining an entire population,
these factors will change very slowly
...


-

The relative income hypothesis: the propensity to save is related to the relative position of
the consumer in the income distribution of his or her reference group
...


-

Duesenberry argued that consumption is strongly influenced by others’ consumption;
hence, the utility index is a function of relative, rather than absolute, consumption
expenditure
...
Conversely, a person who has a relatively high income will
save
...


-

Friedman (1957) and Modigliani and Brumberg (1954) proposed that future income or
lifetime income would be the most important determinant for saving and consumption
when formulating the permanent income theory and the life-cycle hypothesis (LCH)
respectively
...


-

Due to the typical rising income profile that most workers have until they retire, the main
predictions of the model are that people will borrow when young, repay their loans and
start paying for retirement as they age, and then not save in retirement
...
Instead, saving is linked to the consumer’s stage in his or her
lifecycle
...
The standard LCH assumes the trade-off between
consuming now or later is made in a rational and consistent manner
...


-

Saving occurs when ‘Planner’ foresees the risk of overspending and takes measures to
prevent the ‘Doer’ from behaving short-sighted
...


Psychological approaches
Expectations:

31

-

Katona suggested that people’s expectations would influence their decisions about saving
and spending
...


-

Hence, in a population, there may be a majority of optimistic or pessimistic consumers,
which may in turn influence aggregate demand
...


-

Brown and Taylor (2006) found that optimism is related to lower saving and that current
financial expectations can predict future consumption
...
These
findings prove the relationship between future financial situation and the willingness to
save
...
Person who is uncertain about his or her
future income will develop tends to save more and borrow less
...
Guariglia (2001) found that households save more when they are uncertain
about their future finances
...


Time Orientation:
-

Time horizon: how far into the future people think

-

Consideration of future consequences: whether they think about the future consequences
of their actions

-

Both Nyhus (2002) and Wärneryd (1999) found that the time horizon have strong
associations with saving
...


-

Lusardi (1999) found that thinking about retirement is a strong predictor of retirement
saving
...
People with short time horizons are less
likely to save and are less likely to reach their saving goals
...


-

‘Consideration of Future Consequences’ (CFC) - the extent to which people consider the
potential distant outcomes of their current behaviors and are influenced by those potential
outcomes
...


Attitude towards saving:
-

Both Keynes (1936) and Katona (1975) argued that most people have positive attitudes
towards saving
...
In another Swedish study, attitudes towards saving were
positive among all respondents, particularly among elderly people
...
He also found that people could simultaneously think
that saving is pointless but beneficial and concluded that people can hold different attitudes
towards their own saving as opposed to attitudes towards saving in general
...


Saving Motives
-

-

Katona’s saving categories:
(a)

For emergencies, corresponding to the ‘precautionary saving motive’

(b)

For retirement

(c)

For children and family needs

(d)

For other purposes (including a house or vacation)

Katona’s saving categories are the most general and although people may use other
categories, they can easily be defined into Katona’s categories
...


-

Buffer stock model: precautionary motive only motivates people who have not saved
enough to meet their need for a financial buffer
...


-

Canova et al (2005) find support for a hierarchical structure of motives
...


-

When testing the predictive power of the six goals on actual saving behavior,
retirement/security and self-actualization have the strongest association with saving
...
Having one saving goal leads to higher savings than not having a saving
goal but having one goal leads to higher saving rates than multiple goals
...


-

More research needed in the area
...


Personality
-

In this line of study, the Big Five taxonomy is used
...
He proposes a model where
personality traits indirectly influence saving through attitudes towards saving
...
In a study of Dutch households, he finds that
conscientiousness is related to financial self-control
...
The
strength of these relationships is mediated by saving attitudes
...
Emotional stability is found to be related to saving
intentions
...


-

Emotional stability and introversion have been found to be positively linked to saving
across studies, although the opposite result concerning extraversion is found by Mosca and
McCrory
...


Financial Literacy and Financial Education
-

The traditional neoclassical economic models of saving behavior assume that people are
rational decision-makers and understand financial information and the decisions that they
make
...
Hence, they cannot
perform the calculations and make the judgements that the economic models assume
...
Financial literacy is also linked
to other types of behavior that will have an indirect effect on saving
...


-

In conclusion, better financial literacy -> better saving, aggregate demand and economic
development
...


-

Thaler advocates for contractual saving rather than discretionary saving because even with
sound personal finance knowledge, it may still be difficult to resist temptations to spend
more than planned
...
However, there is large variation in the saving behavior between people
of the same age and income groups, and psychological concepts may help explain this
heterogeneity
...
People have expectations about their future situations, which may be uncertain,
and these expectations influence their decisions in the present
...


-

Attitudes toward saving, saving motives and personalities all influence saving behavior
...


CHAPTER 14 The Psychology of Borrowing and OverIndebtedness
-

Over-indebtedness: the sum-total of payment demands, for example utility bills as well as
loan repayments, are causing unsustainable financial stress
...
There is evidence that borrowing is broadly related to the lifecycle
...


-

Consumer Sentiment Index: assesses people’s confidence regarding their own and the
country’s current and future economic positions
...


Determinants of borrowing /1st Stage/
-

The first stage of credit use reviewed by Kamleitner involves deciding whether to borrow
at all
...


-

Those who experience financial hardship borrow to make ends meet, whereas those who
are rather better off, and of a materialistic disposition, are more likely to borrow to fund a
consumerist lifestyle (changing cars)
...


36

-

People benchmark themselves against their peers and increase consumption to bridge
perceived gaps
...


Financial Exclusion and Access to Credit
-

The decision to borrow depends on its availability and accessibility
...


-

Non-white; lower-income; less-educated applicants are more likely to be rejected
...


-

Those on lower income and those with higher pre-existing debts are typically subjected to
higher interest rates when borrowing, which may dissuade people from accessing credit
and further perpetuate exclusion
...


-

Engaging in more active money management behaviors, such as keeping track of one’s
balance, has been found to be inversely related to the amount of debt
...


-

Also, low self-control has been associated with making greater use of higher-cost credit
...


Credit Choice Processes /2nd Stage/
-

Involves evaluating and deciding on several key things - the amount to borrow, the lender,
the cost, whether to use secured or unsecured credit, or revolving or fixed instalment credit
...
Those who
do it, tended to be younger and have higher levels of education
...


Evaluation
-

Ranyard and Craig (1995) proposed an alternative, dual mental accounting model in which
credit options are represented in a simplified manner as mental accounts
...


-

In the latter case, each future repayment is integrated into its associated budget period, so
that the weekly or monthly repayment amount is the most important aspect of cost
...


-

Rnyard et al
...


-

Many of the former type, which was the most frequent, involved the simple decision
heuristic, ‘take the best APR’
...
These are consistent with the alternative mental account representations
described earlier
...


-

After Katona’s (1975) surveys found that most borrowers were unaware of the APR
charged on their loans, the US adapted ‘truth in lending’ legislation which further expanded
internationally
...
On the
negative side, however, the APR is a complex statistic that can be misunderstood
...
, 2006)
...


-

In addition, repayment decisions depend on psychological dispositions and states, as well
as contextual variables
...


-

Concern for future consequences has been found to correlate with credit card repayment
level
...


Routes to Over-Indebtedness
-

A review by Ford (1988) identified three broad groups of factors associated with
defaulting:
(a) The macroeconomic and social environment
(b) Changes in personal circumstances that can disrupt the household's income or
expenditure
(c) Psychological factors

-

Berthoud and Kempson (1992) found that their respondents explained problem debts as
being mainly due to reduced income or other changes in circumstances (34% of
respondents); insufficient income (25%); unexpected bills (10%); or overlooked payments
(8%)
...


-

Having multiple debt occurrences was also related to having children, having more credit
commitments and less unfavorable attitude towards arrears
...


-

In France, the number of over-indebtedness cases filed with the authorities in recent years
has been almost a quarter of a million a year
...


-

The French Survey identifies the critical factors of over-indebtedness as lack of
commitment to budget management and lack of precautionary savings and use of revolving
credit as a substitute for income
...


-

Gathergood (2012), lower levels of financial literacy were associated with overindebtedness
...


Psychological Consequences of Debt
-

Fitch, Hamilton, Bassett, and Davey (2011) concluded that ‘plausible data exist which
indicate that indebtedness may contribute to the development of mental health problems’
(anxiety, strained family relations, unhappiness)

Depression
-

Wildman (2003) observed higher levels of depressive symptoms (such as loss of sleep,
feelings of inadequacy) among those who felt financially strained
...


-

Finally, feelings of hopelessness, worthlessness, and demoralization (e
...
at not being able
to make repayments, or at receiving income support) appeared to mediate the link between
debt and depression
...


-

Taylor, Pevalin, and Todd (2007) offered some conflicting findings, however, having
observed significant increases in stress for men who entered into mortgage arrears in the
past year, while women showed increases in stress only over a longer period of time
...
noted that stress due to housing repayment difficulties was associated with
larger increases in stress than unemployment, or divorce
...


-

Notably, the amount of debt did not predict age differences in anxiety (adults in their forties
had the highest debt levels), but younger adults were more likely to be in default and had
higher debt-to income ratios
...
There are some conflicting
results, however, with Norvilitis, Szablicki, and Wilson (2003) having found no link
between credit card debt and stress among a student sample
...


-

Higher financial anxiety had behavioral consequences, such as being more avoidant of
financial information, and having taken longer to cognitively process it
...
1% of a change in people’s financial behavior
...


-

In Amsterdam, for example, the ‘Vroeg eropaf’ system launched in 2008 sees major
creditors such as utility companies, and social housing organizations and landlords
contacting local authorities to alert them to individuals in arrears
...

Summary
-

Financial exclusion limits access to mainstream credit, resulting in higher costs for those
least able to afford it
...


-

At the point of credit choice, information search has been found to be limited in some
vulnerable groups, although recent technological developments have lowered the
psychological costs of search
...


-

A common repayment strategy is to choose the highest level that is affordable to reduce
the total cost and the length of the loan
...


-

Routes to over-indebtedness are varied but are often linked to low income and a
combination of life events leading to income shocks
...
The research reviewed
has policy implications for credit information disclosure, financial education and how-to
best support those in financial distress
...
Knowing how psychological factors affect financial
behaviors is important in order to improve investors’ ability to make good choices
...


-

In financial lingua, markets are efficient
...


-

Future stock prices are impossible to predict from past trends or any public information
...
If a stock
is overvalued arbitrageurs sell it, if they don’t own it, they use ‘short-selling’
...


-

In efficient markets, a mispriced stock is like a $100 bill dropped on the sidewalk—it won’t
be long until someone picks it up
...
(booms and busts and other anomalies → stock mispricing can
for longer than predicted by the efficient market hypothesis)

-

Behavioral finance offers additional explanations based on psychological research on
judgement and decision-making; it acknowledges that stock investors are boundedly
rational and form judgements influenced by cognitive bias, emotions, and others’ actions
...


-

Using such insights, behavioral finance seeks to increase understanding of why stock
mispricing’s emerge and persist, by modelling investor behavior in a descriptively more
accurate way than standard economic models which assume that investors behave
rationally
...


-

Kacperczyk, Nieuwerburgh, and Veldkamp (2014) identify a small segment of fund
managers, who are both the best stock-pickers when prices are on the rise (in ‘bull

43

markets’) as well as the best at timing when to move out of stocks and into safer
investments in periods of general stock price declines (‘bear markets’)
...


-

Several studies document consistent over-performance or under-performance among
sections of investors, and investment skill has been empirically linked with individual
factors such as genetics (Barnea, Cronqvist, & Siegel, 2010), cognitive ability (Korniotis
& Kumar, 2013), and IQ (Grinblatt, Keloharju, & Linnainmaa, 2012)
...
(frequent trading → more commissions & taxes)

-

Overconfidence with regard to one’s ability to price stocks is suggested as the explanation
for excessive trading
...


-

Barber and Odean (2001), hypothesized and found that men trade more and earn poorer
returns than women
...
Hence, the degree to which
investors over-estimate the precision of their forecasts develops as a function of previous
trading success
...
g
...


-

It is instead the belief that one is a better investor than the others that has been empirically
linked with high trading frequency (Dorn & Huberman, 2005)
...


-

Alternative explanation to high trading frequency is that some investors are sensation
seeking
...
Some may thus
simply enjoy trading and focus more on the thrill and less on the profit
...
(In line with the efficient market hypothesis)

-

However, the price continues to rise or fall over subsequent weeks, this is not in line with
the efficient market hypothesis
...


-

However, if an earnings announcement points in the same direction as consecutive
preceding announcements, investors may overinterpret this as a trend and thus instead overreact to the news (De Bondt & Thaler, 1985)
...


-

De Bondt and Thaler (1985) show that stocks that have been extreme losers over a threeyear period do better in the following three-year period than previous extreme winners
...


The Disposition Effect: Selling Winners Too Early and Losers too Late
-

Momentum and under-reaction and overreaction to news exemplify anomalies argued to
contribute to the mispricing of stocks
...
One such
regularity is the ‘disposition effect’ - investors seem disposed to sell winners early and hold
on to losers (Shefrin & Statman, 1985)
...
For tax purposes, investors should postpone taxable gains by continuing to
hold their profitable investments, and capture tax losses by selling their losing investments
...


-

Disposition effect diminishes with financial knowledge and experience (Dhar & Zhu,
2006)

-

Frazzini (2006) shows that even investment professionals are susceptible to the disposition
effect and that this adversely affects their returns
...
When failing to account for the
disposition effect, prospect theory is shown to predict either the opposite behavior or that
disposition-prone investors would not invest in stocks in the first place
...

(Smaller gain today than larger gain tomorrow)

Diversification
-

While investors are advised not to ‘put all their eggs in one basket’ they still lose money
because of under-diversification
...


-

Home bias might be the reason why investors don’t fully diversify their portfolio
...


-

This could also explain why people hold too much stock in the company where they’re
employed
...
, Grinblatt & Beloharju,2001)
...


46

Emotional Influences
-

To study the effect of emotions on stock market decisions, behavioral finance researchers
analyze market data using proxy variables believed or known to induce (+) or (-) mood
...


-

This suggests that being in a good mood makes investors more optimistic (more willing to
take risks and buy stocks)
...


-

Kamstra, Kramer and Levi (2003) documented below-average stock returns during winter
months and attribute this to shorter daylight hours
...


-

In a similar vein, Edmans, Garcia, and Norli (2007) document significant stock market
declines following losses by national soccer teams in international competitions
...
’s (2003) claim that seasonal variation in stock returns is caused by variation
in sunlight and not by some other seasonal factor is supported by Kramer and Weber’s
experiment
...


-

Another approach is conducting experiments where mood is induced
...
Negative emotions, such as
anxiety, had the opposite effect (Kuhnen and Knutson, 2011)
...


-

They also made more accurate judgements and earned better returns than participants
induced with a good mood
...


-

The above studies target ‘incidental’ moods
...


-

Lo and Repin’s 2012 study findings suggest that while it is generally a good idea to keep
a ‘cool head’ when making investment choices, psychological research shows that emotion
in fact can contribute to better decision-making by drawing attention to relevant aspects of
the choice
...


-

The ‘affect heuristic’ predicts that having a good (bad) feeling about something make
people overly associate it with positive (or negative) attributes and therefore choose it (or
not choose it)
...


-

Moreover, merely anticipating emotions may influence investment behavior
...


-

These findings are all consistent with the ‘ostrich effect’, investors in times of poor stock
market performances seem inclined to ‘bury their heads in the sand’
...


Social Influences

48

-

Not just emotions, but social pressures also play part in behaviors in the financial market
...


-

Informational herding arises when investors ignore their own ‘private’ information and
instead imitate other investors’ choices because they believe the others to be better
informed
...
Ignoring private information can be
beneficial when a market possesses the ‘wisdom of crowds’ (Surowiecki, 2004), referring
to the observation that the average judgement among a large group of individuals who all
make independent judgements is generally more accurate than any one individual
...
Reputation herding is an example of
normative social influence
...
Dorn, Huberman, and Sengmueller (2008) found that individual investors at a
German discount broker traded more similarly than expected by chance and interpret this
as evidence of herd behavior
...


-

Lakoshinok et al
...
1% of US pension funds to be on the same side of the
market in a typical stock and quarter, using a less conservative measure, Sias (2004) reports
compelling evidence of herding among fund managers
...
Social influence can also be indirect, for example, investors independently of
each other use identical information sources or investment strategies, in which case,
correlated trades indicate ‘clustering’ rather than herding
...


-

Success stories and advice from friends, colleagues, and neighbors can also influence
investors
...
Interestingly, the likelihood of entering the
stock market does not diminish with a poor performance of neighbors, possibly indicating
that people only talk about their investments when they are successful
...
They often don’t realize that these experts have
incentives to tout particular stocks and that they themselves herd
...


-

Yet, there is no consensus regarding whether contemporary behavioral finance models
better predict investor behavior than traditional economic models
...
(2009) suggest that in order to help prevent or mitigate future market
collapses, behavioral finance research should focus less on disproving the efficient market
hypothesis and more on questions relating to how market functionality might be improved
...


-

Investors may also need sensible ‘nudges’, for example, by having investment alternatives
presented to them in a psychologically informed way that increases the likelihood of
making a good choice
...


Summary
-

Most investors fail to make big returns in the stock market, in part because they trade too
frequently
...
Furthermore,
investors tend to initially under-react to news and sell winners too early and losers too late
...
A challenge for economic psychology is to explore
ways of counteracting short-termism in financial markets
...


Taxes and Compliance

50

-

Taxes can be an instrument to shape behavior by providing incentives (e
...
, to consume
healthy food and engage in environmentally friendly activities) or by increasing costs to
control undesirable behavior (e
...
, smoking and excessive consumption of energy)
...


-

A progressive tax system can
reduce the unequal distribution
of wealth and has been found to
be positively related to social
well-being

at

the

aggregate

national level
...

-

However, people try to avoid
taxes or decrease tax burdens
...


Audits and fines explain part of
tax behavior and are without
effect on tax avoidance, i
...
, legal
methods to reduce the tax burden
such as exploiting loopholes in the tax law
...


Tax Attitudes by Individual Taxpayers
Tax Laws and Tax Evasion

51

-

Because the law is very complex (it always has been), majority of the people can’t
understand what is right and what is wrong
...


-

Tax evasion is often not seen as a serious crime, despite the majority of taxpayers’
willingness to abide by the law
...
Honest people were perceived as hard working, but as less intelligent than tax
evaders
...


-

The recent success of tax authorities in the fight against tax evasion on a large scale,
especially in Germany, have led to a greater awareness in the population of the necessity
of taxes
...


-

Survey study on tax morale in Germany found that the population believes it is important
to comply with the tax laws
...
In addition, many
think that the tax code is too complicated and unfair (Bund der Steuerzahler Deutschland
e
...
, 2014)
...


-

Sussman and Olivola (2011) showed that consumers considered goods advertised as ‘taxfree’, i
...
, with a price reduction in the magnitude of the sales tax, to be more attractive
than goods with a larger price reduction not linked to tax
...
In a study conducted by
Kirchler (1998), blue-collar and white-collar workers, and civil servants mentioned public
goods, welfare, social security, and justice when asked about what came to their mind about
taxes
...


-

The self-employed and entrepreneurs mentioned audits and fines and taxes as a
disincentive to work, as public constraint, the complexity of tax law, bureaucracy and the
non-transparent public use of tax revenues
...


-

Taxes can be seen as restrictions
...
According to reactance theory (Brehm, 1966), restricted freedom is often
responded to by doing the opposite of what is requested
...
Kirchler (1999) investigated
whether self-employed’ and entrepreneurs’ resistance to taxes was dependent on the length
of time they had run their business: a shorter business history was correlated with increased
perceived restrictions of freedom and consequently higher intentions to evade taxes
...


-

From a legal perspective, tax evasion is illegal, whereas tax avoidance and tax flight are
usually considered legal behaviors which − though not following the spirit of the law – do
follow the letter of the law
...


-

From a psychological perspective, taxpayers perceive tax avoidance, tax evasion, and tax
fight differently along legal and moral dimensions: tax flight was considered legal but
immoral behavior
...


53

-

By exploiting the possibilities offered by complex and ambivalent laws, their activities may
be at the border of the law but hardly over the border
...


-

If aggressive tax planning and tax avoidance strategies are made public, and if the public
understands that egoistic profit-maximizing strategies are directed against the community,
citizens’ reactions (e
...
, consumer boycotts) may have more impact on tax planning than
complex laws that are adjusted by lawyers who chase the ‘robbers’ who continue
exploiting ambivalences and loopholes in the law
...


-

There are different bases of power, which can be integrated into a two-dimensional
structure of harsh (i
...
, coercive and reward power) and soft (i
...
, legitimate, expert,
referent and information power) forms of power
...
Until Recently, the tools most often used for regulation were
founded in the concept of coercive power and manifested as command-and-control
approaches through audits and fines
...
In a taxpaying context, the concept of legitimate power is founded on other bases
than compulsion and pressure, instead trying to convince taxpayers that voluntarily
cooperating is the right course of action
...
It enforces adherence to rules, focuses on
deterrence-based compliance and is quite rigid
...


54

-

While rigid forms of regulation are likely to be perceived as a manifestation of coercive
power, more flexible forms of regulation are likely to be perceived in terms of power based
on expertise and legitimization
...


-

However, a problem arises when the population includes both compliant and noncompliant

groups and the government employs a coercive regulation, this undifferentiated approach
may cause negative feelings such as uncertainty, anger, and anxiety
...

-

Depending on the motivational posture of taxpayers, regulatory strategies should vary,
encompassing self-regulation, enforced self-regulation, discretionary command regulation,
and non-discretionary command regulation
...


Regulation and Trust

55

-

Flexible regulation through both legitimate power and well-directed coercive power should
strengthen the perception of the authorities as legitimized experts, and consequently
increase trust in the authorities and cooperation with the authorities
...


-

Reason-based trust means that the tax authorities are trusted because they pursue relevant
goals, because taxpayers depend on the authorities, and because the authorities appear
competent and benevolent
...


Interaction Climates between taxpayers and tax authorities
Antagonistic and Synergistic Interaction Climates
-

Antagonistic interaction climate - tax payers and authorities working against each other

-

Synergistic interaction climate - taxpayers and authorities working together

-

While the use of power, especially coercive power in a distrustful relationship between
citizens and authorities, is assumed to foster an antagonistic climate, mutual trust and
protective power are assumed to strengthen cooperation and foster a synergistic climate
...


-

In an antagonistic climate, taxpayers neither trust in the benevolence of authorities nor in
the cooperativeness of other taxpayers
...
If the authorities are not perceived as cooperative and other taxpayers are
assumed not to pay their taxes properly, the intent to avoid and evade one’s one tax duty is
likely to be strong (Rothstein, 2000)
...
Tax authorities are not seen as dominant agencies that
enforce tax compliance, but as agents acting in the service of citizens towards the wellbeing of the community
...


56

-

Authorities using fair procedures and engaging in assisting taxpayers rather than
exclusively focusing on audits and fines are perceived as trustworthy
...


-

This resembles the trust paradigm identified by Alm and Torgler (2011) as one of the three
paradigms of tax administration:

1
...

2
...

3
...

Slippery Slope Framework
-

In the slippery slope framework, Kirchler, Hoelzl, and Wahl (2008) and Kirchler, Kogler,
and Muehlbacher (2014) proposed that in an antagonistic interaction climate, the strong
power of the authorities leads to enforced compliance
...


-

Muehlbacher, Kirchler, and Schwarzenberger (2011) confirmed the assumptions of the
slippery slope framework and show also that taxpayers feeling forced to contribute by the
authorities attempt to think strategically about how to avoid tax pressure, rather than
cooperating spontaneously
...


-

Trust also originates from proper use of power, in the sense that the authorities protect
the cooperative majority from free riders
...


-

When the power of tax authorities is perceived as legitimate power, it likely has a positive
effect on citizens’ trust
...


57

-

Vertical monitoring is based on checking tax files retroactively, whereas horizontal
monitoring focuses on fair play, understanding and transparency between taxpayers and
the authorities, and the planning of future activities of businesses and their tax
consequences
...


-

It is necessary to adopt strategies building on both economic and psychological arguments
to promote cooperation
...


-

Vertical monitoring is based on checking tax files retroactively, whereas horizontal
monitoring focuses on fair play, understanding and transparency between taxpayers and
the authorities, and the planning of future activities of businesses and their tax
consequences
...


-

It is necessary to adopt strategies building on both economic and psychological arguments
to promote cooperation
...
At the bottom of the pyramid are more frequently used
strategies of first choice that is less coercive, less interventionist, and cheaper
...
Their belief in luck manifests itself in
cognitive biases, fallacies, and real skills
...


-

Lottery buyers may miscalculate and believe they can make money
...

Because the extremely low odds of winning the jackpot are far lower than what people

58

experience in everyday life, they may not be able to estimate just how tiny they actually
are
...


-

Availability heuristic: people’s attention may have been drawn to news coverage of a
number of highly impressive jackpot wins and, as a result, they would overestimate their
chances of winning
...


-

There are other motivations for playing: people may play lottery together with friends as a
social activity; they may also buy lottery tickets to experience excitement; they may be
‘entrapped’ by the thought that, if they stop buying tickets, they will miss the jackpot
...
If certain
numbers have recently appeared among the winning ones, people tend not to bet on them
whereas, if particular numbers have not appeared for a long time, they are more likely to
bet on them
...


-

Because the result of the gamble is revealed within seconds after buying the scratch card,
people can quickly buy another card, if they wish
...


-

Another difference is that after the initial print run of the scratch cards, the winning chance
changes after winning cards have been claimed
...


ROULETTE /9% of UK adults/
-

Roulette is a good game to discuss loss chasing (Cohen, 1972)
...


59

-

It is quite common for gamblers to gamble more after losing
...


-

They would be facing an uncertain loss with some possibility of winning back their money
...


-

Martingale strategy: it claims to guarantee winning in a gambling session
...
The roulette
ball does not remember its history
...

In a limited number of rounds, the return could deviate far away from the expected value
...


FRUIT MACHINES /18% of UK adults/
-

One of the main phenomena identified in studies of fruit machine gambling is the effects
of a near miss
...


-

A near miss makes gamblers feel that luck is with them and that success is on its way
...


-

In fact, by using functional magnetic resonance imaging, it has been found that the part of
the brain that responds to real winning also responds to a near miss (Clark, Lawrence,
Astley-Jones, & Gray, 2009)
...
Confusion between losses and gains could lead to problem gambling
...


SPORT BETTING /33% UK adults/
-

Gamblers believe that there is useful knowledge to be learned about different sports
...
Betting companies also sell
past records to people who want to carry out analyses feel empowered by knowing the past
records of sports teams and the latest updates
...


-

Superstition is common in sports gambling
...


60

-

Ladouceur, Giroux and Jacques (1998) found that experts won more times than randomly
selected betters but did not win any more money
...


-

Xu and Harvey (2014) discovered the opposite: in sports gambling, gamblers predicted the
trend in their betting performance would reverse
...


-

This actually produced a hot hand effect because safer odds are more likely to produce a
win and risky odds are more likely to produce a loss
...
They might
become experts simply by winning more times rather than winning more money
...


-

In a lottery and roulette, anomalies are rare and when they happen, it is difficult to profit
from them; in card games, there are real cases of sustainable successes
...


-

The argument that card game is a skill-based game may give it a status of a sport rather
than gambling
...
For example,
casinos do not welcome card counters and they may restrict entry for such players
...

They found that, although the expected return was positive with the card counting
technique, with minimum stake of $100, the 95% confidence interval of return ranged
between –$59,570 and $76,044
...
5% of men, 0
...
9% of the entire adult population are problem gamblers
...
Internet gambling, because of its constant
availability and convenience, may exacerbate problem gambling
...
(2015) found that half of problem gamblers reported that convenient online
payment increased their monetary losses
...
Neurological
researchers found that Problem gamblers viewing gambling scenarios show decreased
brain activity in regions that control impulse, emotion, and decision-making and that
respond to loss but increased activity in those regions associated with pleasure and risk
taking
...


-

Serotonin, dopamine and hormones are associated with problem gambling
...
Injecting women with testosterone
results in reduced sensitivity to loss and increased risk-seeking (Eisenegger & Naef, 2011;
Van Honk et al, 2004)
...


-

Blaszczynski and Nower (2002) suggested that there are three kinds of problem gamblers:
(1) gamblers with poor judgement and decision-making skills - no psychopathology prior
to gambling; (2) those who gamble in order to satisfy emotional needs- has a family history
of problem gambling; and (3) gamblers with neurological or neurochemical dysfunctions typically exhibits impulsive or antisocial behaviors that are independent of their gambling,
they have weak control over their behaviors that is manifested not only in gambling but
also in other ways
...
This approach appears to be useful to some of them
(Hodgins, 2005) but not for others
...


62

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This overestimation may arise from the use of the availability heuristic, from illusions of
control, or from over-inflated confidence associated with the acquisition of knowledge
specific to the gambling domain
...
Some of
these techniques are effective: real skills in some card games can bring profit
...
They believe their
luck is going to turn and they must bet again to win the money back
...
Confusion arising
from this could also encourage the continuation of gambling
...
Problem gamblers may have abnormal brain activities or
neurotransmitter levels
...


CHAPTER 23 Life Span Perspectives
-

Increased number of options make consumer choices more difficult
...


-

Better economic decision outcomes are observed among individuals with better decisionmaking competence
...

Some decision tasks may require skills that decline with age, and others may require skills
that improve with age
...
Good decisions were seen as involving systematic comparisons of the
available options, so as to select the one with the best expected future outcomes
...


-

Fluid cognitive abilities have been associated with better performance on hypothetical
decision tasks, including those involving financial discount rates, and applying decision
rules to consumer choices
...


Age Related Changes in Cognitive Deliberation
-

Abilities relevant to cognitive deliberation, such as processing speed and working memory,
decrease with age from the mid-twenties
...
For example, older adults are more likely than younger adults to show errors
in applying decision rules to select options from a choice set (Bruine de Bruin et al
...
One possible consequence is that older
adults perform worse on consumer decisions that require comparisons across many
alternatives
...


The Role of Experience-Based Knowledge in Decision-Making
-

Experts rely less on cognitive deliberation, because they have learned how to tackle
decisions in their domain
...


-

Experience-based knowledge improves with age
...


-

Older adults’ ability to avoid the ‘sunk cost’ bias is related to age-related changes in
semantic memory or learned world knowledge
...


-

Experience-based knowledge can also undermine performance when financial ‘experts’
become overconfident about what they think they have learned (Törngren & Montgomery,
2004)
...


-

Due to experience-based knowledge, performance on credit-related decision tasks tends to
peak when people are in their fifties despite cognitive ageing
...
Older adults may also be misled by
experience, such as when repeated exposure to misleading health claims increases the
likelihood of misremembering them as true
...


The Role of Emotions in Decision-Making
-

To reduce cognitive effort, decision-makers may choose to ‘satisfy’ or select the first
option they deem good enough, rather than ‘maximize’ or compare all options in order to
find the best one (Simon, 1956)
...


Age-Related Changes in Motivation and Strategies
-

Older adults are more likely than younger adults to self-identify as satisficers rather than
maximizers (Bruine de Bruin, Parker, & Strough, 2016)
...

-

Older adults do switch to more deliberative processing when they are explicitly instructed
to give reasons for their choices, thus highlighting the role of motivation (Kim, Goldstein,
Hasher, & Zacks, 2005)
...


-

Older adults also list more positive than negative attributes of decision options, which
contributes to their greater choice satisfaction and they report less negative affect than
younger adults
...
This so-called ‘positivity effect’ affects older
adults across a wide range of tasks, with varying effects on performance quality
...


Interventions
-

If people face problems in making specific decisions, policymakers and practitioners may
decide to design interventions
...


Decision Aids
-

Decision aids may be designed to support a specific decision, such as which loan to choose
or how to save for retirement
...


66

-

A ‘tournament’ strategy that introduces smaller subsets of options may improve older
adults’ decisions
...


-

One potential limitation of decision aids is that people may not be motivated to engage
with the presented information
...


-

Adding narratives of other people’s personal experiences may compel people of all ages to
engage with presented information, at the risk of distracting from statistical facts
...


-

To further motivate older adults’ engagement with decision aids, accompanying
instructions should encourage a focus on emotional reactions rather than on specific
informational details
...


-

To build experience-based knowledge, individuals should probably be trained in economic
decision-making from an early age because developing expertise takes many years of
deliberate practice
...


-

Teaching simple rules may be more effective than teaching complex rules, which can create
cognitive overload and choice avoidance (Schwartz, 2004)
...


Delegation
-

Older adults value their independence when making decisions
...


67

-

Older adults are more likely than younger adults to have financial advisors, they also
experience more complex financial decisions than younger adults
...
Their financial decisions may
instead be influenced by family members, friends, and colleagues (Loibl & Hira, 2006)
...


-

Married women may therefore leave financial decisions to their husbands and miss
opportunities to develop the financial literacy they may need if they outlive their husbands
(Hsu, 2011)
...


Nudges
-

‘Nudge’ interventions are those that design a choice environment to promote choices that
will be beneficial to most decision-makers
...
Because
people of all ages often defer difficult decisions, setting the default to a beneficial option
makes it more likely that people will end up choosing it
...


-

Like any intervention strategy, nudging also has its limitations
...
Another
limitation is that people may dislike the paternalism inherent in nudging
...


Better Samples
-

Many studies on ageing and decision-making have recruited community-dwelling older
adults and university-attending younger adults
...


68

-

Longitudinal research is needed to examine how decision-making competence develops
with age
...


Better Intervention Development and Evaluation
-

To develop effective interventions, it is important to have a solid understanding of the
wants and needs of the target audience, the problems they face in making recommended
decisions, and how those problems are best resolved
...


-

It is important that the effectiveness of intervention strategies is systematically tested
before proceeding with their widespread implementation
...


69



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