The use of risk in understanding financial decisions and institutional uncertainty

The idea that rationality and emotional factors are involved in financial decisions is well accepted in many economic approaches and in organisation theory. This paper compares specific relevant arguments in behavioural finance and sociology. The aim is to show the implications of these different analyses for the financial sector. The question is whether behavioural finance emphasises the concept of risk more than uncertainty. The paper suggests that cognitive and emotional factors are usefully examined in light of approaches from both behavioural finance and sociology. The first looks at individuals primarily, the second at structural (policy and market) factors. I argue that the latter influence organisational choices of different time orientations towards the future. In exploring the potential of this approach, the paper poses three organisational decision models, that take uncertainty and its relevant social institutions into account, while acknowledging that time preferences and discounting by individuals are well-explored in behavioural economic frameworks.     

Elementary Preservice Teachers’ and Teacher Educators’ Perceptions of Financial Literacy Education

The authors conducted an online survey of elementary teacher education programs within a large midwestern state to assess preservice teachers’ and teacher educators’ beliefs about and preparedness to teach financial literacy. Very few preservice teachers had meaningful experiences with personal finance in high school, college, or personal decision making. No teacher educators reported ever teaching financial literacy in their higher education roles. Only 13% of teacher educators and 25% of preservice teachers thought that it was very important to teach financial literacy in elementary education. Most teacher education faculty and preservice teachers reported that they were not well qualified to use state economics standards or the JumpStart standards for financial literacy. Preservice teachers were more confident in meeting financial literacy standards than teacher educators. Both preservice teachers and teacher educators expressed openness to collaborating with other faculty members, members of the financial service industry, and parents to teach financial literacy. Follow-up phone interviews affirmed that elementary preservice teachers and teacher educators value social studies education (and financial literacy) less than reading and mathematics education. Qualitative results also suggest that elementary preservice teachers and teacher educators would like more easily accessible resources for teaching financial literacy.     

Behavioural influences in Portuguese foreign direct investment

The paper presents a behavioural economics approach to FDI. It relies on questionnaires and interviews with Portuguese managers to present evidence of the role played by herding, anchoring, mental accounting and other behavioural rules in FDI location decisions. It originates a set of heuristics influencing the direction of FDI flows and it confirms the prediction of the Heiner, 1983, Heiner, 1989 that the higher the uncertainty faced by decision makers the more frequent will be the use of behavioural rules. The results go beyond neoclassical theory by helping to explain non-maximizing decision-making by managers.     

Is consumption efficiency within households falsifiable?

The collective household model is based upon the assumption that decision makers have achieved efficient outcomes. This paradigm, which has become one of the leading approaches in family economics, is seldom, if ever, rejected, raising doubt about its falsifiability. We show that the standard approach to test the collective model may yield misleading inferences. We develop a new test procedure to assess its validity. Our approach extends to households that potentially include more than two decision makers. We provide an informal meta-analysis that suggests that much of the evidence in favor of collective rationality in the empirical literature appears to be inconsistent with our test. We illustrate the latter using data from a survey we have conducted in Burkina Faso. Consumption efficiency within monogamous households is not rejected using the standard testing procedure while it is clearly rejected using our proposed test procedure. Furthermore, our test also rejects consumption efficiency for bigamous households. We conclude that intra-household efficiency does yield empirically falsifiable restrictions despite being scarcely rejected in the literature.     

Reframing child protection: A response to a constant crisis of confidence in child protection

Child protection systems appear to be in a continual crisis of confidence. They get criticised for not doing enough to protect some children, whilst at the same time being criticised for being too intrusive or not managing demand. This constant balancing act drives almost continual reforms, none of which appear to reduce further crises of confidence. The central issue facing tertiary child protection systems stems from their function as makers of sometimes highly uncertain risk screening decisions. Uncertainty leads to errors; false positives and false negatives. Two recurring issues challenging child protection agencies are concerns about these errors. Fears about doing too much are concerns about false positives and fears of doing too little are concerns about false negatives. The need to address both issues within the context of uncertain high stakes decision making, in a highly risk intolerant environment leads to poorly formed sentinel event driven policy that in turn leads to organisational fragility. A decision outcome-based performance model based on Signal Detection Theory provides indicators that explicitly outline the link between these two strategic issues facing child protection systems. This has improved dialogue, understanding and support from sponsors. It has led an informed focus on improving decision making and stabilisation of decision thresholds. It demonstrates that Child protection systems are in fact very responsive and do perform well in their decision making (risk screening) function. Social work decision makers provide value in their decision making in spite of highly uncertain decisions to make. Child protection systems do not need reform, they need to be “reframed” to better understand true performance and so avoid poorly informed reactive policy responses to the genuine challenges that they face.     

ACCOUNTING PRACTICES AND ORGANIZATIONAL DECISION MAKING

In this paper we argue for the importance of a sociologically informed study of organizational accounting practices. By making the nexus between accounting and decision making problematic, instead of given, we move issues of interpretation and hierarchical control to the center stage of understanding the social construction of accounting practices. We suggest that inductive case studies of the organizational setting is a promising methodological strategy for identifying how accounting operates as an organizational control system. We focus on debates and proceedings of the board of directors as an overlooked source of data on decision making and organizational practices. We show how accounting practices are part of the strategic control system that functions to interpret the environment and direct the adaptation of the organization in a manner particular to the substantive rationality of corporate decision makers. We illustrate these contentions with a case study of accounting practice changes over a six year period.     

Impact of inflated perceptions of financial literacy on financial decision making

We examine whether inflated perceptions of financial literacy affect financial decision making. Gaps between objective financial literacy and self-reported (perceived) financial literacy (blind spots) predict 19 financial behaviors better than age, gender, income, ethnicity, marital status, self-employment status, and general education levels. Only two predictors, perceived financial literacy and financial education, carried similar levels of predictive power on financial behaviors. Those with inflated perceptions of financial literacy are more likely to miss mortgage payments, receive a collection call, use informal debt, and have poor banking behavior. Those without blind spots make better financial decisions. The differences between those with and without blind spots are more pronounced among individuals with higher education and income.     

Story‐Making as Methodology: Disrupting Dominant Stories through Multimedia Storytelling

In this essay, we discuss multimedia story‐making methodologies developed through Re?Vision: The Centre for Art and Social Justice that investigates the power of the arts, especially story, to positively influence decision makers in diverse sectors. Our story‐making methodology brings together majority and minoritized creators to represent previously unattended experiences (e.g., around mind‐body differences, queer sexuality, urban Indigenous identity, and Inuit cultural voice) with an aim to building understanding and shifting policies/practices that create barriers to social inclusion and justice. We analyze our ongoing efforts to rework our storytelling methodology, spotlighting acts of revising carried out by facilitators and researchers as they/we redefine methodological terms for each storytelling context, by researcher‐storytellers as they/we rework material from our lives, and by receivers of the stories as we revise our assumptions about particular embodied histories and how they are defined within dominant cultural narratives and institutional structures. This methodology, we argue, contributes to the existing qualitative lexicon by providing innovative new approaches not only for chronicling marginalized/misrepresented experiences and critically researching selves, but also for scaffolding intersectional alliances and for imagining more just futures.     

Behavioral economics has two ‘souls’: Do they both depart from economic rationality?

In this paper, I argue that behavioral economics, far from being a monolithic theory, consists of two different ‘souls’ and that a fundamental asymmetry exists between them, with regard to the nature of the departures from the economics’ ‘canonical model’ they focus on. While a first class of departures deals with the major cognitive limitations and systematic biases in decision-making affecting economic behavior, a second research area investigates deviations from the classic assumption that economic agents are systematically driven by the pursuit of material self-interest. Even though on methodological grounds the two research areas share a broadly inductive approach – as they both aim at incorporating the major results obtained through several empirical methods (in particular, via experimental work) into formal economic analysis –, I claim that rather different methodological conclusions and regulatory and policy implications can be drawn, depending on the cognitive or social nature of the departures from the standard economic model under study.     

DO SUNK COSTS MATTER?

That sunk costs are not relevant to rational decision making is often presented as one of the basic principles of economics. When people are influenced by sunk costs in their decision making, they are said to be committing the “sunk cost fallacy.” Contrary to conventional wisdom, we argue that in a broad range of situations, it is rational for people to condition behavior on sunk costs because of informational content, reputational concerns, or financial and time constraints. Once all the elements of the decision‐making environment are taken into account, reacting to sunk costs can often be understood as rational behavior. (JEL D0, D01, D8, D81, D83, D9, D90)     

Financial literacy and retirement planning in the Netherlands

The complexity of financial decisions that households now face has increased to unprecedented levels. At the same time, households seem to lack the financial knowledge to cope with these decisions, including how to save and invest adequately for retirement. In this paper, we examine the relationship between financial knowledge and retirement planning in the Netherlands. For this purpose, we have designed a module on financial literacy and planning for the De Nederlandsche Bank (DNB) Household Survey. We find a strong and positive relationship between financial knowledge and retirement planning; those who are more financially knowledgeable are more likely to plan for retirement. Using information on economics education acquired in school, we show that the nexus of causality goes from financial literacy to planning rather than the other way around.     

An empirical test of competing hypotheses for the annuity puzzle

This paper conducts the first empirical test of numerous rational and behavioral hypotheses for the low annuity demand observed in private markets. We designed a questionnaire based on findings from economics and psychology, enabling us to simultaneously investigate a broad range of motives that presumably constitute the reluctance to buy annuities. To address the interdependence of financial product choice and domain-specific investor sophistication, we construct and employ a novel, comprehensive measure of “annuity literacy”. The results from a representative survey among German consumers reveal that both established rational and so far untested behavioral motives are significant barriers to annuitize wealth. Furthermore, the overall level of annuity literacy is rather low, with most respondents lacking knowledge of an annuity’s core mechanics. These findings disclose promising directions for annuity suppliers, policy makers, and researchers towards resolving the annuity puzzle.     

Responsibility and limited liability in decision making for others – An experimental consideration

Agency in financial markets has been claimed to foster excessive risk taking, ultimately leading to bubble formation. The main driving factor appears to be the skewed bonus system for agents who invest other people’s money. The resulting excessive risk taking on behalf of others would imply that such bonus systems crowds out responsible decision making for others in order to serve egoistic self-interest. To test this implication, we conduct laboratory experiments comparing decision making for others with and without such a bonus system. First, we show that, in the absence of bonus systems, decision makers invested significantly less for others than for themselves. Second, we show that limited liable decision makers—participating only in gains but not in losses—invested substantially more for others than for themselves. Hence, our results suggest that indeed limited liability outweighs responsibility.     

Nonprofit's Use of Awards to Improve and Demonstrate Performance: Valuable Discipline or Burdensome Formalities?

Arrangements to certify that an organization's management systems meet standards of good practice are an increasingly prominent feature in the environment of public and private nonprofits. This paper reports an exploratory study of the issues that this phenomenon presents to managers and policy makers, drawing on the limited literature, and five case studies covering two different schemes. The main conclusions are that nonprofits can and do use these awards in very different ways, and hence the outcomes are diverse. These findings run counter both to the rational system assumptions on which such arrangements are based, and to the general thrust of institutional theory with its emphasis on isomorphism. Some implications for decision makers and future research are outlined.     

The impact of regulation on pharmaceutical research expenditures: a dynamic approach

This paper estimates the impact of federal regulation of drug quality on research spending by the pharmaceutical industry. The theoretical approach recognizes that the effects of these regulations on research spending depend upon the reactions of R&D decision makers and the information available during project selection. The information available to R&D decision makers in the 1960s suggests that it would have been difficult for them to forecast accurately regulatory effects on research profitability. As better information developed in the late 1960s and early 1970s, however, regulation had a significant effect on research spending. These differences in response are tested econometrically and prove to be empirically significant. The estimates of current regulatory effects on pharmaceutical R&D spending are quite large.     

Divining Value with Relational Proxies: How Moneylenders Balance Risk and Trust in the Quest for Good Borrowers1

This analysis of the U.S. credit industry explores how lenders evaluate people during the loan application process. They use a variety of risk‐assessment techniques in conjunction with trust‐building mechanisms that I call relational proxies. The relational proxies that lenders rely on are behavioral impressions, reputation information, and financial narratives that explain information on credit reports. Lenders use this subjectively evaluated trust assessment interdependently with standardized financial information to enhance their decision‐making process. Face‐to‐face evaluation of potential borrowers is mediated by institutional rules meant to reduce the need for trust. However, for the lenders in this study, a good borrower is always a trustworthy borrower.     

Military procurement as rational myth: Notes on the social construction of weapons proliferation

This paper outlines four theoretical approaches to the sociology of weapons proliferation: strategic-functional theories, factional theories, geopolitical theories, and institutional theories. Although rarely formulated explicitly, the first three approaches are implicit in the existing literature on proliferation. All three see proliferation as the result of rational decision making, although they differ as to the locus of these decisions, with strategic-functional theories focusing on the nation-state, factional theories on subnational interests, and geopolitical theories on global superpowers. In contrast, the institutional approach disputes the rationality of procurement, arguing instead that weapons purchases are structured and driven by institutionalized normative structures that link advanced weaponry with modernization and sovereignty. The policy implications of this perspective are discussed, and parallels to recent developments in organizational theory are highlighted.     

The language of money

ABSTRACT

This article examines the relationship of personal finance in a narrative-based treatment strategy as applied to couples. It builds on behavioral economics as the undergirding of an approach to financial literacy. By matching the treatment strategy with the stages of readiness for change, couples are able to gradually adopt a financially prudent lifestyle. The authors argue that the couples’ conflicts about personal financial behaviors are a proxy of underlying problems in intimacy. The use of a narrative-based theory addresses how personal finances are used to control relationships.     

Rethinking comparative studies: an agent–centred perspective

Broadly speaking, three rival approaches to comparative research can be identified. One suggests that the study of different countries and their regions is unproblematic, and is best exemplified by scholarship in mainstream (particularly neoclassical) economics. Stress is placed on an integrated theoretical perspective emphasizing apparent similarities while explaining differences by reference to the heritage of nations and places. By way of contrast a second approach, which owes much to anthropology, relies on case studies and presumes the existence of profound differences between countries and regions. Stress is placed upon the local cultural, social and political factors that sustain persistent difference. A third approach is rooted in new institutional economics and argues for the significance of national institutional frameworks, supposing that those frameworks shape and structure the actions of agents. Whatever their differences and origins, idealism drives each method of comparative study. In this article, we consider these rival theories of comparative study, and suggest an alternative model based upon a set of fundamental assumptions about the nature of human cognition. These assumptions are the building blocks for our analysis, which has global applicability. We focus in particular upon consciousness and reflexivity, the interplay between agency and structure, and the connection between intention and rationality. Implications are then drawn for the practice of comparative studies. In the penultimate section of the article we comment on the limits of comparative studies emphasizing the problems that lie behind the translation of complex concepts within and between languages.