There are some people who still make financial decisions which are considered “bad” even though; they have answers to their questions and any information they might need. Analyzing the cultural factors that influence these decisions might lend more significant knowledge about human beings and assist in their financial decision-making.
Cognitive Biases – This is one of the prominent reasons why people might not make the best financial choices. They are simply heuristics; those are patterns of thinking that generate poor or inappropriate decisions. For instance, the availability bias makes people over-exaggerate the likelihood of events based on their recency or salience leading to irrational reactions to short-term fluctuations of the market. Likewise, the confirmation bias propels investors to steer information in a way that favors their belief permitting them to make bad investment decisions.
It is also no doubt that strong emotional states influence financial decisions. This restricts the decision-making process and results in knee-jerk or ‘chicken’ reactions. Speculative behavior can be explained through the fear from missing out and through overconfidence; both phenomena push investors to invest without conducting sufficient research and to increase risk-taking.
In addition, as noted above, financial literacy or lack thereof will potentially impact decisions. Commission found that most consumers lack basic understanding of money matters like budgeting, saving, investing and debt management. Failure to understand these concepts may have detrimental effects on individuals since they will not have knowledge of making reasonable and transparent financial decisions and will as well be susceptible to being duped into contracts of predatory lending.
There are other elements from the social and cultural environment that influence financial behavior. Some other aspects include the use of peer pressure, cultural expectations, as well as the social and cultural expectations that may affect spending habits and saving as well as investment. Which include conspicuous consumption the imprudent buying of material things to demonstrate wealth and status which makes one spend excessively.
In addition, it is possible to state the influence of the environmental factors – the socioeconomic stratification, family history as well as the way of living – on the formation of the financial decision. This may be due to the influence of poverty and financial constraints on an individual that may shape their mentality and behaviour towards money in different ways from those who are not faced with dire circumstances.
Human beings make “bad” financial decisions for a number of reasons, for instance, cognitive biases, emotions, financial illiteracy, sociology aspects, and personal experiences. These influences are very important to be aware of and in a way be proactive in fighting their effects on individuals while they make financial decisions. Education and awareness, self-awareness, and seeking professionals besides counseling help an individual achieve financial goals.