Recipient Organization
UNIVERSITY OF FLORIDA
G022 MCCARTY HALL
GAINESVILLE,FL 32611
Performing Department
Family Youth and Community Sciences
Non Technical Summary
Consumers have been facing a multitude of financial pressures resulting from the 2008 global financial crisis. Many Home owners struggle foreclosure while the collective student loan burden of $1 trillion has surpassed total credit card debt. Furthermore, aging baby boomers face the critically important decision of the optimal time to file for Social Security retirement benefits. Financial information is complicated and many consumers feel that they lack the adequate knowledge and skills for obtaining and processing the information. Additionally, consumers' deciisons may also be influenced by psychological factors. These factors complicate consumer financial decision-making across the life span. Home ownership has long been considered the American dream as well as a key vehicle to building wealth. This project was developed with a goal to better understand consumer financial decision-making across the lifespan. How consumers process information and make decisions regarding housing (rent vs. buy & mortgage), post-secondard education financing, and Social Security retirement will be examined. This research focus fits within the following Financial Literacy and Education Commissions (FLEC) 2012 Research priorities: Identify optimal combinations of financial information, advice, regulation, disclosure, and delivery mechanisms, including default options, and their impact on starting and maintaining positive financial habits, Identify, evaluate, and build consensus on key metrics for financial education/capability, including measures of knowledge, behaviors, and well-being. Behavioral economics/psychology research has shown that consumers often make irrational choices (Ariely, 2008; Thaler & Sunstein, 2008;). Consumers are faced with a plethora of information from a variety of sources that may be of questionable reliability. Despite vast sums spent worldwide, we find that interventions to improve financial literacy explain only minimal variance in subsequent financial behavior (Fernandes, Lynch & Netemeyer ,2012, p. 1). Numerous studies reveal that while Americans of all ages are financially illiterate, they overestimate their financial decision-making skills (Lusardi, 2010; 2011; Lusardi & Mitchell, 2008). There is a pressing need to understand how American households make financial decisions, and to improve the financial decision-making skills of the American family. This research is well suited for a broader land-grant community educational and research priority. Building upon what we have learned about consumer financial socialization and the importance of psychological constructs in the saving decision, this new research fills an important gap in our understanding of the consumer financial decision-making process. The research is informed by the latest in behavioral economic theory and is being applied to improve the overall well-being of the American households. Our previous research and additional studies over the past two decades clearly show that psychological factors play a powerful role in influencing consumer decisions. While conventional consumer education focuses on providing rational consumers with information (i.e. Consumer Reports) to make optimal decisions, information management (the economics of information) research clearly shows that how consumers acquire and process information may not always be optimal. There is a solid theoretical foundation upon which to build a long-term research agenda. Shefrin and Thaler (1988) developed the Behavioral Life Cycle (BLC) hypothesis to enrich the life cycle theory of saving by incorporating three psychological components: self-control, mental accounting, and framing. Shefrin and Thalers model recognizes consumers decision-making process is influenced through the psychological principals of self-control, mental accounting, and framing. However, the process of how self-control, framing, and mental accounting work has not been explored sufficiently within the context of consumer decision-making. There is a need for research that recognizes how psychology influences important consumer decisions related to student loan debt, home buying, and when to collect Social Security retirement benefits. This study will examine how psychological factors like self-control, mental accounting, and framing influence decisions linked to housing, saving and when to start social security benefits. Identifying the heuristics specific to each of these three critical consumer decisions will help consumer educators and information providers to enhance the effectiveness of their messages. These interventions may lead to improved financial decision-making by consumers. The researchers will use an experimental design to examine how consumers make financial decisions. Using an experimental design based on scenarios helps to enhance internal and statistical conclusion validity by increasing control over the manipulated variables and reducing random, unmanageable variables (Jin & DeVaney, 2011). Written scenarios will be developed to simulate the financial decisions. Subjects will be randomly assigned to one of the scenarios. The scenarios will be varied to manipulate factors that are frequently involved in decision making. The researchers will include constructs from information management (such as source of information, use vs. avoidance) and constructs from the BLC theory. The team will utilize an Internet sampling firm to facilitate random assignment to the different scenarios and provide sufficient responses for the study. Outcomes, Findings, and implications will be reported to consumer educators including the extensive Cooperative Extension network. We also plan to present this research at appropriate conferences and will submit manuscripts to relevant journals. This project will assess barriers and motivators that influence the decision-making making process of consumers. Also, this project will continue to examine the effect of economic, psychological, and sociological factors on savings behavior. In summary, this project is an extension of NC 1172 which examined "The Complex Nature of Savings Behavior." However, the focus of this new project is on information management and financial decision-making. This proposal recognizes that consumers are increasingly influenced by the multiple sources of information that they receive on a daily basis. This project is expected to result in a greater understanding of how consumers make financial decisions. The results should provide a foundation for developing, implementing, and evaluating educational initiatives to increase financial literacy and improve financial decision-making. It may also help to inform regulatory efforts.This project will result in a better understanding of how consumers use or avoid information and which sources of information are used and/or avoided by different sub-groups of consumers based on demographic and psychological factors. A better understanding of how consumers receive and process information in addition to the awareness of factors that were studied in NC 1172 (e.g., economic, psychological, and sociological factors) should lead to increased effectiveness of CES educational initiatives. Also, the results can be used to recommend public policy initiatives and suggest new or enhanced approaches for reaching consumers beyond traditional audiences.
Animal Health Component
80%
Research Effort Categories
Basic
(N/A)
Applied
80%
Developmental
20%
Goals / Objectives
Determine motivators that affect economic decision-making in specific decision situations (housing, student loans, and Social Security) across the life-span of households
Determine barriers that affect economic decision-making in specific decision situations across the life-span of households
Determine how motivators and barriers to economic decision-making can be presented in specific decision situations across the life-span of households
Suggest strategies that can be used to improve consumer financial decision-making
Project Methods
This study proposes use of mixed methods to achieving its various objectives. These include: 1.) Determine motivators that affect economic decision-making in specified decision situations across the life-span of households; 2.) Determine barriers that affect economic decision-making in specified decision situations across the life-span of households; 3.) Determine how motivators and barriers to economic decision-making can be manipulated to promote savings across the life-span of households; and 4.) Determine factors that can reduce investment fraud and financial exploitation. Our study uses the Behavioral Life Cycle Hypothesis framework to examine factors influencing the consumer decision-making process. Our initial hypotheses focus on key factors such as the role of, mental accounting, economic socialization, framing, self-control, the role of information, on decisions related to retirement, home ownership, student loan usage. We will utilize both online surveys and smaller local convenience samples aimed to explore the decision making by individuals at relevant age ranges. This study is concerned with groups at the household formation stage, wealth building stage, and entering retirement stages of life. These stages are largely consistent with typical age ranges and family composition. Our sample for the only survey should be a total of 1500; with this sample size, the results are expected to lie within two standard deviations of the mean response. Ideally the sample will be split amongst the three different life stages. The Research Committee will contract with an independent data collection agency to sample, collect, and clean the data for the project. An outside data collection agency is preferred to ensure that the instrument is administered uniformly and to increase efficiency in administration and data collection. This agency can randomly assign participants to different versions of the survey. These web surveys will be identical except for the treatment. This treatment could include the introduction of information to the participant, or a difference in choice architecture. The first year of our study will utilize Family in Transition Project, in order to further refine the model for the remaining stages of the project. The current research project will analyze the household decision making data to determine what factors are significant in the decision making process. Specifically, researchers will look for motivators and barriers in the household decision making process. With this unique dataset the researchers will be able to investigate the financial socialization process of adolescents as they grow and form their own families. The psychological variable of self-control will be tested to see if associations exist between self-control and wealth creation, educational attainment, and life satisfaction. In addition, qualitative measures of problem solving ability and personality attributes will be included to see what ways these variables are associated with financial outcomes and the decision making process. The study of this panel dataset will help inform future survey and experimental design research in the area of consumer decision making. These experiments of consumer decision making will also be conducted in person with small groups on participating campuses and communities. The goal of these experiments will be to observe the relationships of framing, mental accounting, and other behavioral factors on decision making. The smaller local samples will need to involve 100 participants and will be conducted by select project team on their campuses. In both instances, the participants will be randomly assigned to a treatment group. The treatment in these experiments will be tied to the role of information as a treatment. This will allow for the sharing of the data collection burden but using a coordinated approach for consistency. The protocols were the same across states and information was aggregated and used to further refine the instrument and survey methodology. Participants will be randomly assigned to treatment groups. The online surveys will also include relevant measures suggested by the behavioral life cycle model and results from the NC 1172 studies on the complex nature of savings. This includes factors such as life cycle stage, self control, barriers to behaviors, and economic socialization. The psychological scales have been previously tested in psychological research and work of the NC 1172 Team. Consistent with Dillman (1978, 1991) our survey would be sent initially, with additional follow up emails sent to encourage participation in the study. Other guidelines that will be followed include putting questions in a logical sequence, using the proper format for answering, having an easily read layout with clear and concise statements, and not going beyond what is reasonable to expect for people to respond. If a monetary incentive is used, the incentive would be sent with a thank you and notification of receipt of the completed survey. Survey Measures: Development of the survey instrument will be a collaborative effort of members of the research team. Major components of the model are: socialization factors, financial knowledge, information management, resources, psychological scales, demographic and economic factors, and measures of financial behavior and decision outcomes. Socialization includes questions about the influence of parents or guardians, whether parents or guardians borrowed for school, bought a home, decided to retire. It also includes exposure to sources of information, the amount of effort in seeking information, and attitudes toward money from observing others behavior. Financial knowledge measures include understanding education financing, mortgage types and Truth in Lending, and retirement funding. Resources include current job status, job security, spouse or partners job status and job security, and emergency funds. Psychological measures include: measures of self-control, mental accounting, framing effects, and risk tolerance. Demographic factors include age and marital status of respondent, sex, education, race, health, and household size. Data Analysis: Descriptive analysis will be used to examine the socialization factors, decision making outcomes, lifecycle stages, financial knowledge, resources, demographic characteristics, and measures of financial behavior of the sample. Factor analysis will be used to examine the scales of the psychological constructs. Regression analysis and structural equation modeling will be used to examine the relationship among all of the factors in the model of financial decision making.