Two Essays on Everyday Financial Decisions
Abstract
Every day consumers make numerous financial decisions which have the potential to increase or decrease their wellbeing in the short-term or long-term. For instance, choosing to pay only the minimum due on a credit card bill can increase liquidity and wellbeing in the short-term, but increase debt and decrease wellbeing in the long-term. My work examines two such instances of everyday financial decisions which influence consumer wellbeing. In Essay 1, I use experiments to examine how the design of retirement savings investment plans can influence the choices consumers make, thus setting them up for comfort or hardship in their retirement. Specifically, I look at how investment decisions are influenced by choice-set size and whether the funds are presented in ascending or descending order of risk. I find that when presented with large choice-sets, consumers who see safer funds first take on lower risk than consumers who see riskier funds first. This happens because consumers get overwhelmed and engage in biased search behaviour. Interestingly, this difference is mitigated when consumers are more financially literate. In Essay 2, I look at a phenomenon, where consumers voluntarily incur a financial loss and improve their wellbeing. I use experiments to examine situations where consumers who are trying to sell an item receive an unfairly low (lowball) offer. In response to this lowball offer, consumers often voluntarily incur a financial loss by choosing to donate the item. I find that consumers choose to donate, as they receive moral rewards that compensate for the loss of financial rewards, but that these moral rewards are received only if they believe the recipient of the donation will value the item at a price much higher than the lowball offer they received. Findings from both these essays can improve consumer wellbeing by providing businesses with insights on how to design choice options that are optimal for consumers, and policymakers with information they can use when designing policies regarding consumer finances and the environment.