The Psychology and Neuroscience of Financial Decision Making

Trends in Cognitive Sciences, 20, 661-675.

15 Pages Posted: 6 Nov 2019

See all articles by Cary Frydman

Cary Frydman

University of Southern California - Marshall School of Business

Colin Camerer

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: September 2016

Abstract

Financial decisions are among the most important life-shaping decisions that people make. We review facts about financial decisions and what cognitive and neural processes influence them. Because of cognitive constraints and a low average level of financial literacy, many household decisions violate sound financial principles. Households typically have under-diversified stock holdings and low retirement savings rates. Investors over-extrapolate from past returns and trade too often. Even top corporate managers, who are typically highly educated, make decisions that are affected by overconfidence and personal history. Many of these behaviors can be explained by well-known principles from cognitive science. A boom in high-quality accumulated evidence–especially how practical, low-cost ‘nudges’ can improve financial decisions–is already giving clear guidance for balanced government regulation.

Suggested Citation

Frydman, Cary and Camerer, Colin F., The Psychology and Neuroscience of Financial Decision Making (September 2016). Trends in Cognitive Sciences, 20, 661-675., Available at SSRN: https://ssrn.com/abstract=3070456

Cary Frydman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Colin F. Camerer

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States
626-395-4054 (Phone)
626-432-1726 (Fax)

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