Why Money Matters: Module 8 - Topic 2

MODULE 8: DEVELOPIN G FIN AN CIAL CAPAB ILITIES

Topic 2: Financial Decision-Making

Section 1 of 1

Topic 2: Financial Decision-Making

Topic 2: Financial Decision-Making

Think of your last major purchase. Did you explore all available alternative options, sort
options into groups, and closely examine di erent features? Or if not, how did you arrive at
your decision? Did you favour what you saw over technical information? Did you listen to the
advice of others?

Behavioural biases, brain functioning, and personal di erences such as gender and culture
a ect our nancial decisions. Based on a growing body of research, we draw from the
psychology, neuroscience and behavioural economics literature to provide an overview of
unconscious obstacles we all face.

Topic video

Let’s hear from Dr Tracey West as she explores di erent biases a ecting our nancial
decision-making.

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Cognitive Bias

Cognitive bias is a term used to describe decision-making based on faulty reasoning.

Common biases include di culty adjusting to new information and being unable to change
views and opinions. Another basis for faulty reasoning is people thinking they can control
outcomes more than they actually can. 

Factors that may contribute to faulty reasoning include not processing probability calculations
well, poor  decision-making under uncertainty, and limited cognitive bandwith.

Emotional Bias

Emotional biases stem from impulse or intuition.

This is where decision-making is in uenced by feelings and can cause decision-making to be

spontaneous, rather than conscientious. Even though the person may not desire the
emotions and may wish to control them, often they cannot. Emotional biases therefore relate
to emotions such as fear, hopefulness, or short-term satisfaction.

But that is not all. Unfortunately we are plagued by many types of biases. Flip the cards to see
what each of the following biases mean.

People tend to strongly

prefer avoiding losses as
opposed to achieving gains.
Loss aversion
Psychologically, losses are
signi cantly more powerful
than gains. 
 People demonstrate
unwarranted faith in their
Overcon dence bias own intuitive reasoning,
judgments and/or cognitive
abilities.

People fail to act in pursuit

of their long-term,
Self-control bias
overarching goals because
of a lack of self-discipline.

People do nothing instead

of making a change. If a
 g g
given situation is the default
Status quo bias choice, people will
frequently let that choice
stand rather than opt out of
it.

People value an asset more

Endowment bias when they hold the rights to it
than when they do not. 

People tend to avoid

making decisions that will
Regret aversion bias result in action out of fear
that the decision will turn
out poorly.
Activity 1

Answer the questions in the Form below. Click on the tickbox when you are nished to
receive a copy of your responses. Bring these to the workshop. 

1006GBS Why Money Matters

Module 8, Topic 2: Reflection

1. Do you relate to any of these biases? If so, discuss how they have had a
positive or negative impact on your financial decision-making.

Enter your answer

2. How do you think your childhood shaped your approaches to financial

decision-making?

Neuroscience
Neuroscience can be used to understand how we make decisions and how we might be able to
make better decisions. For example, most nancial information is presented in dense text,
with technical de nitions and terms. However, we may be able to better process information,
or more willing to engage with the materials, if it is presented visually. Our visual processing
power can also lead us to use limited information to draw conclusions or be selective about
the information we use.

Watch the video 'Selective attention test'

Watch this video to see how you may be selective in the information you process.

selective attention test

Regarding nancial decisions, there are hormones and neurotransmitters that are triggered
when a person is engaged in risk-taking (testosterone), fear and stress (cortisol), reward
processing (dopamine) and trust (oxytocin). These chemical reactions mean that behaviours
can become addictive. 
There are key brain areas that are associated with particular processes:

Amygdala Negative emotions, fear

1 of 12

Anterior Executive function, con ict

resolution
cingulate cortex

2 of 12
Caudate nucleus,
putamen, in the Reward processing

striatum

3 of 12

Attention and timing, pleasure,

Cerebellum fear

4 of 12

Insula Hunger, disgust, social snubs

 5 of 12

Hippocampus Memory and learning

6 of 12

Nucleus Pleasure and reward, addiction

accumbens
 7 of 12

Occipital cortex Visual processing

8 of 12

Motor action, mathematical

Parietal cortex reasoning

9 of 12
Prefrontal cortex Planning, cognition

10 of 12

Prefrontal cortex Theory of mind, mind-reading

(Brodmann area 10)

11 of 12

Temporal cortex Memory, recognition, emotion

 12 of 12

Other Individual Differences:  Age/Generation and Culture

Research shows that there are di erences in nancial knowledge between people of di erent
ethnicities, ages and generations.

Activity 2

The following questions are used to test nancial literacy, how do you fare?

Suppose you had $100 in a savings account and the interest rate was
2% per year.
After 5 years, how much do you think you would have in the account
if you left the money to grow?

Exactly $102
 Less than $102

More than $102

Don't know

SUBMIT

Imagine that the interest rate on your savings account was 1% per
year and in ation was 2% per year.
After 1 year, with the money in this account, would you be able to
buy…

More than today

Exactly the same as today

Less than today

Don't know
 SUBMIT

Do you think the following statement is true or false?

Buying a single company stock usually provides a safer return than a
stock mutual fund.

True

False

Don't know

SUBMIT

Lifecycle Change and Generational Differences

As we age, our needs and wants change. The working phase is characterised by changing
circumstances, from moving out of home, starting a family and thinking about retirement. 
 Human Life Cycle

We may go from owning our possessions to sharing them with the household.
Life events, like divorce, job loss, illness, death of friends and family shape our attitudes and
nancial circumstances. At each di erent phase, our focus changes. For example, in
retirement, focus may turn to checking o the ‘bucket list’, and how to best look after heirs
(bequests, etc).
In the Spotlight

Dr Kylie Burns from the Gri th Law School explores issues of compensation for injured
people. Injury is a big social and economic problem.   
The generation a person belongs to may also shape their nancial decision-making.
Signi cant events happen that shape generations, like the World Wars and the terrorist
attacks of September 11. Economic circumstances like severe depressions or exuberant times
also a ect job markets and the availability of money and spending habits. Other key trends
that shape a generation include parenting and technology.

The table below presents information about generational di erences.

Attitudes that Shape

Birth Years Name
Financial Decisions

Worry about high debts

New Silent Generation 
2000 to and keen to save money,
or 
present yet willing to spend on
Generation Z
consumable goods.

Dwindling well-paying
jobs, often willing to
Millennials 
spend money to live in
1980 to 2000 or 
comfort, more debt
Generation Y
(payday loans,
Afterpay).
 Attitudes that Shape
Birth Years Name
Financial Decisions

Pursued education,
spent less on luxuries,
Thirteeners blue-collar jobs were
1965 to 1979 or drying up when they
Generation X entered the workforce,
developed an
investment mentality.

Raised in a climate of
general nancial
1946 to 1964 Baby Boomers prosperity – became
wealthy and
complacent.

Very frugal and thrifty

due to impact of wars
1925 to 1945 Silent Generation and rations. Good at
planning ahead and
saving.

Su ered through the

impact of wars on the
G.I. Generation
economy and family
(WWII/
1900 to 1924 life. Very frugal due to
Greatest Generation/
living on food rations
Federation Generation)
and xed things instead
of buying new things.

Older people are often required to make complex nancial decisions with signi cant
consequences for well-being. It could be expected that as older people have experience in
making a wide range of decisions, they are more likely to make a better decision. 

However, as we age, physical traits such as hearing, eyesight and mobility deteriorate, but
also our cognitive ability; our reasoning and con dence wane too. Finke, Howe and Houston
(2017) found a decline in nancial literacy performance with age but not a change in
con dence in nancial decision-making abilities. Accordingly, older people are a vulnerable
cohort and may fall victim to scams and elder nancial abuse.

Watch the video 'Elder Abuse: Know the signs'

Elder Abuse. Know the signs

Young people
The Household Income and Labour Dynamics in Australia (HILDA) Survey of Australian
households found that people under the aged of 25 are the least nancially literate, with only
24 percent answering all ve questions correctly, compared to 55 percent of those
approaching retirement age (Wooden & Watson, 2007).

Prior surveys  found similar results, explaining that young people had lower scores because
they were particularly poor at keeping track of nances, planning ahead and choosing
suitable nancial products.
Student debt can have a detrimental e ect on academic performance and well-being of
students as they strive to fund their education and reduce their debt through part-time
working patterns. 

In Australia, one in three nancially independent university students have regularly missed
lectures and classes because they had to work while 14% reported regularly going without
food or other necessities because they cannot a ord them (Universities Australia, 2018). 

In addition, the irregularity of income for students can lead to increased vulnerabilities from
external nancial shocks and uncertainties.

Overall, studies report that less nancial knowledge is associated with reliance on debt, risky
nancial behaviours, higher use of credit cards, living beyond their means, and holding more
destructive beliefs about money.

Culture
Like generations, customs and values have evolved in response to circumstances faced. It is
thought that Asian cultures, who have experienced much hardship and various wars, give
money and status high value as a survival mechanism. Other characteristics of Asian cultures
is that responsibility for the family transcends individual’s personal concerns and they are
proud to be self-su cient. 

Religion can also prescribe approaches to making nancial decisions. Islamic Law, for
example, prohibits interest, risk and speculation. This gives rise to Islamic banking, which is
focused on socially responsible banking.

There is a gap between Western contemporary money

management practices and First Peoples’ social and
cultural worldview of money. 

Demosthenous et al., (2006)

Australia's First People

The disconnect can be understood through exploring and respecting  First Peoples’ social and
cultural worldview, and can be a key driver for improving nancial wellbeing among
Indigenous communities. 

For many Indigenous people, their money story is rooted in their cultural identity; their view
of money has been shaped by their culture. One of the objectives of research is to look at First
Peoples’ perspectives as to what constitutes good nancial wellbeing – that is, by using a
strengths-based approach, to look at what works and how more of ‘what works’ can be
enhanced so that nancial well-being can be improved for First Peoples. 
 Source: Caring for Aboriginal Children and Families
https://www.absec.org.au/news-reforms-overlook-Aboriginal-children-
families.html

As discussed in module 1, an important aspect of cultural identity is the Aboriginal person’s

obligation to kin and community in uence on money management practices.

The cultural values surrounding money as a form of relationship and obligation to kin

and community are part of First Peoples people’s money story. Consequently, these values
impact the way First Peoples people share, save, and spend money (Daly & Smith, 2002). First
Peoples money stories also need to be considered within the historical framework of
colonisation and dispossession (Pearson, 2011).  

“The history of not having had the opportunity to

manages one’s money, has contributed to a lack of
con dence with money and money management, and a
lack of trust in nancial institutions”
 Pearson, 2011

Thus, strategies to improve nancial wellbeing need to  help First Peoples  build con dence
in nancial decision-making practices. For First Peoples, sharing   their money with other
family members is something that is important to do; they feel morally obligated to share
whatever they have with family. Demand sharing (known as ‘humbugging’) has a place in the
First Peoples ways of life (Muir et al., 2017). Sharing what they have among their kin,
reciprocating with each other and acknowledging the goodwill is a common traditional
practice that they observe. Nevertheless, demand sharing can lead to a tension between
holding on to money and maintaining social relationships. The introduction of capitalism and
individualism into First Peoples’ society placed  higher value on money and individual wealth
than a traditional communal lifestyle. The concept of individualism is inconsistent with First
Peoples’ identity where sharing and caring, that is communalism, is at the heart of First
Peoples culture Pearson writes “an aura of ethical and cultural illegitimacy attaches to
indigenous people who pursue enterprise and wealth” (Pearson, 2011).

Wealth accumulation is a “metaphor for family,

community, culture, and knowledge; it is more important
than paying their bills” 
Irvine, 2019

First Nations Foundation

Research conducted by the First Nations Foundation about the Financial Economy and
Indigenous Young People in Australia found Indigenous Australians are over-represented in
the severally or fully nancially excluded group and that lower levels of nancial literacy were
found to prevalent among those who are nancially excluded.
Further, the research emphasised the contrast between non-Indigenous young people for
whom their future aspirations involve a move towards increased independence; whereas for a
lot of young Indigenous people the centrality of their future aspirations is rooted in kinship,
family and connectedness in their identity which cannot be overlooked (Lahn, 2012).

Poverty for a lot of First Peoples people is not about whether they have enough money (Irine,
2019). Wealth accumulation is about the extent of their family network and their capacity to
be able to get access to food and shelter when they need it. Often you hear First Peoples
people in the East Kimberley say, “I need a feed, so I am going out shing. I am waiting on
my family members to pick me up” (a non-monetary response).  Whereas,  non-First Peoples
 are more likely to say , “I need a feed, how much money do I have in my account, and can I
use it for food, or is that set aside for something else?” (a monetary response).

Arguably then, promoting a culture of savings among First Peoples goes beyond a dollar
amount in a bank account. Wealth in the Indigenous world is about the people and their
connections to their country; it is about having enough to share. 

From a Western perspective, this cultural de nition of wealth could be viewed as a barrier for
an individual getting ahead. But perhaps this contemporary, arguably ‘sel sh’ view, should be
reconsidered, and the de nition of savings rede ned?

“Financial education programs should let families and

individuals make choices about nancial management,

question themselves on what they want to aspire to, and
o er tools and strategies to help make money work for
them. But we have to be realistic about the barriers our
communities face. Many people are living in a world of
welfare dependence, far from nancial participation. Their
reality is social and economic exclusion.”

- Paul Briggs, First Nations Foundation

Image source: University of Melbourne

Image source: First Nations Foundation (2011)
https://toolkit.aigi.com.au/wp-
content/uploads/2013/02/RA_Indig_Financial_Capability_WEB.pdf
Activity 3

First Nations Foundation has successfully helped Indigenous people reconnect with $24.04
million dollars of superannuation.

Check the box in the list below if you think the factor helped make them successful.

Acknowledgement of the barriers faced by communities

An understanding of the peoples' history and story 

Travelling to remote communities

Culturally appropriate services

Cultural protocols for dealing with First Peoples

Providing choices

Knowledge of local language

Providing product knowledge

Providing transport
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In the next topic we will look at risk and trust in terms of nancial management.

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