publication . Article . 2010

Consumer decisionmaking: insights from behavioral economics

Wenhua Di; James C. Murdoch;
Open Access
  • Published: 01 Jan 2010
The increased complexity of the financial markets has made it difficult for consumers to choose products that best serve their interests. Behavioral economists explore consumers' psychological process in making decisions, such as immediate gratification, overconfidence, inertia or a lack of cognitive ability to understand the costs and benefits of financial services.
free text keywords: Financial literacy ; Consumer behavior

1 In The General Theory of Employment, Interest and Money (published in 1936), John Maynard Keynes explained how “animal spirits,” or psychological motives, resulted in economic booms and busts, a view that had been deemphasized over decades.

2 See “Information Disclosure, Cognitive Biases and Payday Borrowing,” by Marianne Bertrand and Adair Morse, The Journal of Finance (forthcoming), available at http://faculty.chicagobooth. edu/marianne.bertrand/research/PayField091008.pdf.

3 See “Empirical Evidence on the Determinants of Rent-toOwn Use and Purchase Behavior,” by Signe-Mary McKernan, James M. Lacko and Manoj Hastak, in Economic Development Quarterly, vol. 17, no. 1, 2003, pp. 33-52.

4 See “Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data,” by Kristopher Gerardi, Lorenz Goette and Stephan Meier, Federal Reserve Bank of Atlanta Working Paper No. 2010-10, April 2010,

5 For more information, see “What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment,” by Marianne Bertrand et al., Quarterly Journal of Economics, vol. 125, no. 1, 2010, pp. 263-305.

6 See “The Power of Afrfimation,” by Crystal Hall, Corporation for Enterprise Development blog, innovation/mhernandez/can_combating_self-perceived_ stereotypes_change_behavior/index.html.

7 See Nudge: Improving Decisions About Health, Wealth and Happiness, by Richard H. Thaler and Cass R. Sunstein, New York: Penguin Books, 2009.

8 See “The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States,” by John Beshears, James J. Choi, David Laibson and Brigitte C. Madrian, in Lessons from Pension Reform in the Americas, Stephen J. Kay and Tapen Sinha, ed., Oxford: Oxford University Press, 2008, pp. 59-87.

9 See “How America Saves 2010, A Report on Vanguard 2009 Denfied-Contribution Plan Data,” The Vanguard Group, July 2010,

10 See “Automating Savings in the Workplace, Insights from the AutoSave Pilot,” by Alejandra Lopez-Fernandini and Caroline Schultz, New America Foundation, Jan. 15, 2010, www. savings_in_the_workplace.

11 According to the Vanguard 2010 report, the majority of the automatic retirement plan set the default deferral rate to be 3 percent or lower, which partly leads to the decline in the overall contribution rates. The AutoSave pilot gives suggestions of small-dollar amounts to be saved per pay period, which may not be suitable for employees making higher wages. For more information, see

12 See “Behaviorally Informed Financial Services Regulations,” by Michael S. Barr, Sendhil Mullainathan and Eldar Sharfi, New America Foundation, October 2008, naf_behavioral_v5.pdf.

13 For more information, see “Consumer Protection,” testimony by Federal Reserve Board Governor Elizabeth A. Duke before the Subcommittee on Domestic Monetary Policy and Technology, Committee on Financial Services, U.S. House of Representatives, Washington, D.C., July 16, 2009, newsevents/testimony/duke20090716a.htm.

14 For more information, visit the Board of Governors of the Federal Reserve System's Consumer's Guide on Credit Cards at

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