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.
Mediator
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.
Moderator
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.
Overconfidence
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.
Anchoring
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.
Overconfidence
Investors overestimate their knowledge, leading to riskier choices.
Anchoring
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.