23 March, 2021, Bengaluru: It is extremely necessary for a consumer to make good financial decisions. Behavioral finance and personality traits play a major role in an individual becoming financially independent. In line with Aristotle’s view: ‘Knowing yourself is the beginning of all wisdom’, Prof Utpal Dholakia threw light on preparing a strategic framework of financial knowledge, in a talk titled: ‘Quadripartite Framework of Financial Knowledge’, hosted by the Centre for Capital Markets and Risk Management (CCMRM) at IIM Bangalore, on March 19th (Friday), 2021. More than 200 people attended the lecture.
Prof. Utpal Dholakia, the speaker for the session, is the George R Brown Professor in Marketing at Jones Graduate School of Business, Rice University. His research interests lie in studying motivational psychology of financial savings, financial awareness and financial decision making of individuals.
Prof. Dholakia’s talk focussed on Financial Literacy: Procedural understanding on how personal finances work; Financial Self-Awareness: Objective understanding of one’s current financial state; Financial Risk Preference: Objective understanding of one’s risk preference with respect to money and wealth, and Financial Habits & Behavioral Tendencies: Subjective understanding of one’s habits and behavioral tendencies related to saving, investing and spending money.
Financial literacy for the masses is a matter of discussion in today’s era. A certain survey predicts that Indians are not saving enough for retirement. The COVID turmoil opened our eyes in many ways. Lack of jobs, economic downturn and other such situations demand a lump sum emergency fund. In a study by Prof Dholakia, 73% of Americans stress on ‘personal finances’ as the primary source of income; 50% have only about a month’s cushion in case of any emergency. Prof Dholakia said: “In spite of experiencing major financial stress amongst the older generation within the past three years, only 39% of the population appears to have enough money to cover a $400 emergency expense. The younger generation faced job loss or financial distress in the past year but only 48% had any retirement savings. This leads to the inference that major financial knowledge is lacking not only in India but also in developed countries like America. Across the demographic section, a significant number of American consumers are financially vulnerable.”
He listed the primary reasons for this as lack of interest in managing personal finances, failure to set and pursue financial goals like building an emergency fund or contribute to retirement savings, and the lack of control on overspending. “The younger generation is prone to impulsive shopping, in turn failing to cultivate supporting financial habit. Ostensibly, they use money to allay emotional responses like anxiety, frustration, fear, anger and hopelessness”. Prof Dholakia has designed a structural model consisting of the financial vulnerability levers and how they affect someone’s response to behavioral stimuli. Mr Buffet’s saying ‘Spend after you save’, has been the cornerstone of this study. “A large percentage of the population is clueless about their personal finances. They struggle with financial problems but never bother to study or analyze their spending habit’’, he observed.
Tips from the expert
A consumer requires the following to make good financial decisions:
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Time value of money
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Systematic investment options
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Knowledge and understanding of financial concepts and risks
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Skills, motivation and confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts
The findings of a large number of studies on financial literacy have provided sufficient data to analyze the trend and shift in personal finance management. “Financial literacy is only a very small step towards financial independence. Real time incorporation of investment structures leads to an enhanced life.
Financial self-awareness begins at home by keeping account of the monthly cash flow of a household. Every consumer’s saving and spending habits should be defined by their assets and liabilities. Risk preference is orthogonal to financial knowledge”, he concluded.
About PIE
Financial knowledge really has more to do with knowing oneself and one’s situation in the domain of money than it does about knowing facts and rules about managing money. The Platform for Investor’s Education (PIE), an initiative by CCMRM in collaboration with the National Stock Exchange of India (NSE), is a collection of videos, podcasts and deep dives that spread knowledge about basic, factual information about saving, investing and spending. In the present era, financial literacy holds as much importance as basic literacy.