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.
Table of Contents
- Introduction and Abbreviations
- Introduction
- Other relevant reports
- Scope of the report
- Abbreviations and terms
- Abbreviations
- Terms
- Executive Summary
- Overall summary
- The basic concepts of behavioral finance and investments
- Behavioral finance and banking
- Behavioral finance and insurance
- Advertising and branding
- Implications for the industry
- Behavioral Finance and Investments
- Investor segmentation
- Impact of biases on investor behavior
- Certainty effect and risk aversion
- Loss aversion
- Figure 1: Ameritrade print advertisement,December 2005
- Figure 2: Schwab web page view, February2006
- Over-reaction
- Figure 3: T. Rowe Price printadvertisement, January 2006
- Figure 4: Fidelity Investmentsadvertisement, December 2005
- Cognitive dissonance
- Familiarity bias
- Anchoring
- Mental accounts
- Representativeness heuristic
- Overconfidence
- Figure 5: Perceptions of investmentperformance, by gender, February 2006
- Figure 6: Perceptions of investmentperformance, by age and income,
February 2006
- Application of behavioral finance principles to retirement plans
- Setting deadlines
- Framing choices
- Limiting choices
- Figure 7: Blue Cross Blue Shield NYMedicare Part D advertisement,
December 2005
- Figure 8: Wellcare Medicare Part Dadvertisement, December 2005
- Financial planning
- How financial services companies can help investors
- Benefits of professional advice
- Figure 9: T. Rowe Price printadvertisement, December 2005
- Figure 10: T. Rowe Price printadvertisement, November 2005
- Structuring products to appeal to mental compartmentalization
- Behavioral Finance and Banking
- Savings
- Income tax refunds
- Figure 11: Tax refunds, by gender andincome, February 2006
- Figure 12: Tax refunds, by age ofrespondent, February 2006
- Figure 13: Use of tax refunds, by gender,February 2006
- Figure 14: Use of tax refunds, by age,February 2006
- Figure 15: Use of tax refunds, by income,February 2006
- Credit cards
- Savings and rewards cards
- Figure 16: MasterCard acquisitionadvertisement, November 2005
- Figure 17: Usage of credit cards andsavings accounts, by gender,
February 2006
- Figure 18: Usage of credit cards andsavings accounts, by age, February
2006
- Figure 19: Usage of credit cards andsavings accounts, by income,
February 2006
- Mortgages
- Single source financial providers
- Behavioral Finance and Insurance
- Probability estimation
- Mental accounting
- Other biases
- Default options
- Inflating insurance claims
- Annuities
- Shopping for insurance
- Auto insurance
- Figure 20: Auto insurance shoppingfrequency, by gender, February 2006
- Figure 21: Auto insurance shoppingfrequency, by age, February 2006
- Figure 22: Auto insurance shoppingfrequency, by income, February 2006
- Figure 23: Auto insurance shoppingfrequency, by gender, February 2006
- Life and auto insurance
- Figure 24: Perceptions of shopping forlife and auto insurance, by age,
February 2006
- Figure 25: Perceptions of shopping forlife and auto insurance, by
income, February 2006
- Figure 26: Chubb print advertisement,November 2005
- Advertising and Branding
- Information overload
- Figure 27: Frequency of application forcredit card(s), by gender,
February 2006
- Figure 28: Frequency of application forcredit card(s), by age, February
2006
- Figure 29: Frequency of application forcredit card(s), by income,
February 2006
- Strategies that consumers use to deal with information overload
- Familiarity
- Oversimplification
- Advertising and information overload
- Figure 30: Schwab print advertisement,December 2005
- First impressions
- Anchoring
- Social conformity and consensus
- Persuasion
- Improving direct mail response rates
- Choice presentation
- Comparison to competitors
- Images shown
- Promotional giveaways
- Impact of advertising on consumer choice
- Advertising and emotions
- Figure 31: Perceptions of financialsecurity, by income,
January-September 2005
- Bibliography
- Appendix: Trade Associations
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