The Emotions and Cognitions Behind Financial Decisions: The Implications of Theory for Practice

Financial decisions are compelled and constrained by non-financial factors. These include personality characteristics of individuals as well as the social environments in which decisions are made. This paper provides an overview of theories that seek to explain how non-financial factors influence financial decisions: Developmental Psychology, Crystallized and Fluid Intelligence, Behavioral Economics, Neuro-Brain Research, and Culture of Poverty. Our interest is in what these theories imply about the behavior of vulnerable, particularly low-income groups. The literature reviewed indicates the importance of emotions and feelings in decision making; these must be considered in developing and evaluating financial literacy education programs. The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Financial Literacy Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA, any agency of the Federal Government, or the Center for Financial Security at the University of Wisconsin-Madison.