Eliciting Individuals’ Financial Decision-Making Approaches with Verbal Protocols

46 Pages Posted: 18 Feb 2021 Last revised: 20 May 2021

See all articles by Thomas Post

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

Wändi Bruine de Bruin

Carnegie Mellon University

Date Written: May 20, 2021

Abstract

How do individuals approach financial decisions? Do they apply sophisticated formulas, 'back of the envelope'-math, do they guess, or something completely different? We show that the verbal protocol method – i.e., having individuals explain their approaches – generates new insights to answer these questions. Our findings on approaches discovered are reliable within sample and have predictive power out of sample. Among other things, we find that when assessing the value of an annuity, 40% of individuals use some math, and some even use formulas similar to actuaries; the other 60% seem to guess. Valuation approaches used predict valuation outcomes and valuation precision, explain puzzling findings reported in earlier literature, and predict a behavioral reaction to an anchoring intervention designed to match one of the approaches discovered. The verbal protocol method opens new pathways to understand financial decision-making as well as to design effective policy interventions.

Keywords: Financial decision-making approaches, Verbal protocols

JEL Classification: D01, D11, D12, D14, D91

Suggested Citation

Post, Thomas and Bruine de Bruin, Wändi, Eliciting Individuals’ Financial Decision-Making Approaches with Verbal Protocols (May 20, 2021). Available at SSRN: https://ssrn.com/abstract=3763784 or http://dx.doi.org/10.2139/ssrn.3763784

Thomas Post (Contact Author)

Maastricht University - School of Business and Economics - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands
+31 43 38 83899 (Phone)
+31 43 38 84875 (Fax)

HOME PAGE: http://www.thomas-post.com

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

Wändi Bruine de Bruin

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

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