Theoretical Framework of Financial Decision Making

Theoretical Framework of Financial Decision Making

Understanding the interrelationship between behavioural biases, financial literacy, financial decision making, and the influence of behavioural finance on individual investors.

Dependent Variable (DV)

The output of the framework, which is affected by other variables.

Behavioural Biases

Cognitive and emotional factors influencing investors' decisions, e.g. overconfidence, anchoring, herd behavior.

Independent Variable (IV)

The foundational input affecting the other variables.

Financial Literacy

The extent of an individual's understanding of financial concepts and products.


The process that bridges the gap between IV and DV.

Financial Decision Making

The steps and thought processes in choosing financial actions, influenced by literacy and biases.


A variable that influences the strength or direction of the relationship between IV and DV.

Behavioural Finance

The study of how psychological influences affect financial markets and decision-making.

Individual Investor

The profile of the person whose decision making is being studied, including demographics like age, income, and education.

Financial Decision Making Framework

Exploring the elements and influencers of how individuals make financial decisions.

Behavioural Biases

Behavioural biases are subjective tendencies that affect financial decisions.


Investors overestimating their knowledge or predictive abilities.

Loss Aversion

Preference to avoid losses over acquiring equivalent gains.

Herd Behaviour

Investors following and copying what other investors are doing.


Relying too heavily on the first piece of information seen.

Financial Literacy

The understanding of financial principles required to make informed decisions.

Understanding of Concepts

Knowledge of interest rates, inflation, and risk diversification.

Financial Skills

Ability to budget, invest, and manage debt effectively.

Access to Information

Availability of financial resources and advice.

Financial Decision Making

The process of making choices regarding wealth management.

Risk Assessment

Evaluating potential gains against possible losses.

Investment Choices

Deciding on various investment options based on personal goals.

Planning and Goals

Setting financial targets and devising plans to achieve them.

Behavioural Finance

The study of the influence of psychology on investor behaviour.

Cognitive Psychology

How mental processes impact financial decisions.

Emotional Influences

The effect of emotions on investment behaviour.

Social Forces

Impact of societal norms and pressures on financial choices.

Financial Outcomes

The consequences of behavioural finance on market phenomena.

Financial Decision Making Framework

Understanding how various factors influence the financial choices of individual investors.

Behavioural Biases

Cognitive factors that skew investment decisions.


Investors overestimate their knowledge, leading to riskier choices.


Decision-making is influenced by initial information or values.

Herd Behavior

Investors follow market trends or majority actions, often irrationally.

Loss Aversion

Preference for avoiding losses over acquiring equivalent gains.

Financial Literacy

The measure of an individual's understanding of financial principles.

Understanding Risk

Grasping the concept of risk and its impact on investments.

Budgeting Skills

Ability to plan and manage personal finances effectively.

Investment Knowledge

Knowledge of various investment vehicles and strategies.

Savings Habit

The propensity to allot funds for future use or investments.

Financial Decision Making

The process of making choices about money matters.

Asset Allocation

Determining the right mix of investments to balance risk and return.

Retirement Planning

Planning for long-term goals and post-work income sources.

Credit Management

Understanding and managing loans, credit cards, and debts.

Insurance Purchasing

Selecting appropriate insurance to safeguard assets and income.

Behavioural Finance Influence

How behavioural biases affect investment choices in financial markets.

Emotional Decision Making

Investing based on feelings rather than objective analysis.

Market Sentiment

Influence of collective mood on market trends and decision making.

Social Influence

How societal norms and advice affect individual investment decisions.

Complexity of Choices

The challenge in making decisions due to numerous options.