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The article is based on a study conducted to analyze factors shaping the consumer choices and financial products. It is a literature review focused on how consumers make decisions and what factors affect the process of their decision-making. The objective of the article is to discuss the developments that have been emerged in household finance. The context of this research is the central concept of the field of consumer economics that the decisions made by consumers usually do not align with the optimal economic models. This implies their decisions are mostly suboptimal in settings with different backgrounds. The article is an attempt to find out the causes behind consumer choices and financial products, taking into consideration the concepts of consumer finance, consumer behavior, consumer financial regulation, consumer bias, choice inefficiencies, mortgage debt, cognitive ability, financial products, and personal investments.
The article is not based on a comprehensive survey to collect data on consumer choices and financial products. It is instead focused specifically on the existing research on credit card borrowing, investment and saving decisions, housing and mortgage debts, and spending and consumption. When analyzed in the context of research, it becomes easier to identify and evaluate the factors affecting consumer choice and financial products. The research done for writing the article is, therefore, secondary in nature, and it presents both quantitative as well as qualitative data to analyze and discuss the findings and make conclusions. The research also takes into consideration some other important economic concepts to make the conclusions more credible and precise by discussing the topic in several aspects. Hence, the design and marketing of financial products have been discussed in the paper. Further, the regulatory policies and procedures for consumer financial products have also been described to complete the analysis. Finally, the article will present research directions for future efforts and things to be considered by the policymakers and researchers.
The article discusses the developments that have been made in research in household finance on the factors that shape choices of consumers and financial products. Poor financial decisions can lead to widespread losses. Poor consumer choices result in losses of the wealth of older adults as well as the aggregate wealth. The economy suffers from high costs as a result of these losses. The factors behind this issue have been suggested to be consumer decisions regarding retirement-related concerns, real estate investment pools, structured financial products, and annuities (Agarwal et al., 2017). Moreover, it is difficult to present a single model that depicts the financial behavior of consumers. In the modern business environment, companies like Apple and Starbucks have great influences on shaping the consumers' financial decisions by offering them highly specialized products. Therefore, the relative effects of consumer behaviors and biases are not clear to date, whether these effects are rational or irrational. It is difficult to speculate which of these effects are dominant.
The existing research has confined its focus on the interventions and the assessment of their possible effects on consumer welfare. It also examines the conditions and factors that could possibly improve the financial literacy of consumers. However, the current study emphasizes to create incentives for the providers of financial services besides giving attention to the consumers’ concerns. This would provide a win-win approach to resolve the issue by catering to the needs of both consumers and providers. The research states that policymakers face issues while making policy responses, optimal contracts, and enforcement. The causes behind these issues include enforcement idiosyncrasy, information asymmetry, and behavioral complexity. It is essential to conduct new research on how to improve the consumer-related financial policies. The impact of technology on consumer’s financial decision-making processes have been analyzed. With the emergence of new technology, the scope of business has been broadened to a great extent. Financial technology is growing continuously in consumer finance. Hence, further decision is left for the consumers how they react to it.
It is essentially important to know the reasons for suboptimal consumer decisions for making related policies and developing regulatory landscape. This is because the suboptimal choices can slow the economic growth and incur substantially increased costs for the systems of social security. The research finds that the main influencers affecting consumer choice inefficiencies include social networks, psychological biases, incentives and self-control, time preference, lack of financial literacy, and cognitive limitations. Further, the research elaborates on the discussion of financial products by describing their impact on consumer choice. A strong relationship exists between the expensiveness of mortgages and the intensity of advertising. Advertising was found to be most effective when the advertising message was targeted at the groups less informed about mortgages. Examples include minorities, less educated, and the poor. Other problems affecting their buying decisions include substandard selling practices of providers, information asymmetry, and complexity of the financial products.
The research provides sufficient insight into consumer choice, its causes, and implications. The factors driving decisions of consumers and financial products are varying and need immediate attention from policymakers, regulatory agencies, and the providers to reduce difficulties of consumers. The improvement in consumer decision-making is inevitable for economic growth.
Agarwal, S., Chomsisengphet, S., & Lim, C. (2017). What Shapes Consumer Choice and Financial Products? A Review. Annual Review of Financial Economics, 9(1), 127–146. https://doi.org/10.1146/annurev-financial-110716-032417
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