This letter is a response to “Manipulate Me: The Booming Business in Behavioral Finance,” published by Bloomberg.com, and can be found at: http://www.bloomberg.com/news/2014-04-07/manipulate-me-the-booming-business-in-behavioral-finance.html.
Behavioral economics has opened a new world as the field answers some interesting questions on how people make decisions. We are bombarded by an incredible amount of information every day, and yet we still find people are not taking advantage of the number of resources at their disposal. A recent Bloomberg article by Ben Steverman notes how technology can be used to help people make the ‘right’ decisions. Wizards of the dismal science, such as Richard Thaler, are noted in the article as they advise governments on how to ‘nudge’ people to make better financial planning decisions (among others). The article also mentions how behavioral economics can be used by private companies in order to stimulate sales.
Upon review, I have come to completely agree with the author on the importance of psychology and behavioral economics in helping people with their decision-making. I hope to illustrate how psychology could affect decision-making and one example is how career planning incentives could be increased early on in a freshman’s life. There are constantly new and innovative things that become available in the world as a result of asking the right questions.
An interesting application of behavioral finance or psychology is in relation to search behavior. It should come as no surprise that different people spend varying amounts of time scouring the land for the best products. At least in part, the time spent determining which product to purchase is dependent upon the locus of control. This is the perception that a person has in regards to the amount of control he/she has on the outcome that affects them. An internal locus of control person (internals) will feel he/she has more control on the outcomes, while an external locus of control (externals) will feel external forces, such as fate or luck, control events.
This research can also be utilized for career planning. A University of Nebraska at Lincoln research project by Edwin A. J. van Hoof and Craig Crossley puzzlingly showcases how externals with high financial need (how much they think their income and monetary assets meet their needs) may search and apply for jobs much more than internals. Since externals think the events are primarily out of their control, they will try to work harder to bridge the gap between their current predicament and their future goal. The existence of short-term stress and ‘financial need’ also push externals to search longer and harder.
Admittedly, it would be difficult to determine which students fit into the internal and external groups. Nevertheless, I think it would be best for universities’ career departments to have mandatory career classes during freshman year so students understand where they are at the moment and the goals they will have to reach in order to sustain success. The right amount of anxiety and stress should allow them to become more proactive earlier in their college lives.
Behavioral economics and psychology continue to answer many interesting questions. With time, I hope behavioral economics and psychology will be used by incoming freshmen to attain greater success.