Behavioral Finance - US - March 2006

Abstract

How do people think about their money? And perhaps more importantly why dont people think more about their money? Observations of financial behavior often contradict the traditional assumptions of economics that people act rationally and in their own best interest in their economic choices. Drawing upon theories from cognitive and social psychology, the study of behavioral finance attempts to explain these departures from rational economic behavior, focusing instead on the cognitive biases and emotional distortions that quite often influence our financial decisions and actions.

Behavioral finance can explain a wide range of common behaviors that are often at odds with an individuals financial wellbeing. For example, it helps to explain why some investment products may not be as successful as companies had hoped, or why people will carry a credit card balance with high interest rates, while at the same time keeping money in a low-yielding savings account.

Some of the areas discussed in this report include how people choose insurance coverage options and savings vehicles and how they finance big-ticket items as well as everyday expenses. Not only can behavioral finance explain financial behavior, but its principles can shed light on topics of interest to marketers and advertisers. Behavioral finance explains what types of information consumers are most likely to pay attention to, and what types of messages will have the greatest impact on financial decisions.

After briefly reviewing the key concepts of behavioral finance and relevant findings from consumer research, this report will use these concepts to address several important questions, including:

• How do consumers deal with information overload?
• How does information overload impact the types of advertising and promotions consumers are most likely to notice?
• What types of messages resonate most with consumers and are likely to result in action?
• What insights does behavioral finance offer for how to best configure complex financial products such as insurance, retirement plans, and banking products?

This report provides a general overview of the burgeoning field of behavioral finance and discusses implications of findings from research in this field. Special emphasis and specific research examples as well as primary Mintel research are presented that relate to financial products and services, including investment products, retirement plans, insurance products, mortgages, savings products, and credit cards.