The Emotions and Cognitions Behind Financial Decisions: The Implications of Theory for Practice

Abstract

Financial decisions are compelled and constrained by non-financial factors. These include personality characteristics of individuals as well as the social environments in which decisions are made. This paper provides an overview of theories that seek to explain how non-financial factors influence financial decisions: Developmental Psychology, Crystallized and Fluid Intelligence, Behavioral Economics, Neuro-Brain Research, and Culture of Poverty. Our interest is in what these theories imply about the behavior of vulnerable, particularly low-income groups. The literature reviewed indicates the importance of emotions and feelings in decision making; these must be considered in developing and evaluating financial literacy education programs.