Over the past couple of years most of us have experienced some anxiety about the economy and our personal finances, to put it mildly. But how have we acted on our new-found awareness of global economics?
Historically, economists assumed that people make financial decisions based on rational thinking. If Macy’s is having a shoe sale and I can save ten dollars, then it makes sense for me to buy shoes there. But what if the nearest Macy’s is 20 miles away and it will cost me more than ten dollars in fuel and time to get there? I should buy the shoes at the store across the street and pay full price, right? Of course I should, but the perception of getting a good deal may be more important to me than the true cost of the purchase.
People make unwise and irrational financial decisions all the time. Behavioral economists and psychologists have recently documented these types of systematic errors, though advertisers figured them out a long time ago. All of which begs the question, does SOCIAL STYLE affect the way we make financial decisions?
According to Hersh Shefrin, a professor of behavioral finance at Santa Clara University, SOCIAL STYLE plays a major role in people’s financial decision-making. He worked with J.P. Morgan Chase to develop an online test of “Financial Style” that categorizes individuals into one of three investor styles: Analytical, Big-Picture, or Emotional.
Analytical investors are good at budgeting and analyzing data, but often spend too much time over-analyzing when they should be acting. Big-Picture investors have a general grasp of their finances, but avoid the details. They might have goals, but need some help planning to achieve them. Meanwhile, Emotional investors keep their immediate needs in mind when making financial decisions, but they are prone to making impulsive choices at the expense of long-term needs.
This sounds familiar, though it seems they may have misplaced one of the Styles. I would offer advice for how each Style can improve their financial decision-making, but I’m still reading the research and studying the websites. For more information, check out ChaseFinancialStyle.com