Psychology, Financial Decision-Making, and Management of Household Essay

Total Length: 2652 words ( 9 double-spaced pages)

Total Sources: 6

Page 1 of 9

The main purpose of this research study is to understand the psychology of decision-making and management of households with respect to Arab students living abroad. The study will take into consideration the impact of the difference in culture and also the influence of such culture in dealing with bank interest. The research model used in this study is the addition of a moderating variable. The data will be collected through questionnaires that will be designed, piloted, and distributed to the target population. Questionnaires will be designed in a way that can manage to gather accurate information on the aspects of psychology, financial decision-making and management of households. It is expected that the construction of accounts subsequent to considering the ambiguous expense, classification of expenses into different categories and psychology of belief in Islamic law, have a positive relationship with the level of spending and financial decision-making. Secondly, classification of expenses into different categories influences the level of spending and financial decision-making. Another expected result is that the psychology of belief in Islamic law and lack of extensive Islamic banking abroad have a positive correlation with spending and financial decision-making.


The aspect of financial education and understanding has become a contentious and significant issue. Its importance has been realized largely because there is increasing intricacy of financial products and also the increasing accountability and liability of people with respect to their own financial well-being. It is imperative to note that knowledgeable, financially educated customers are more capable of making proper decisions for their households and as a result are better suited to enhance their economic and financial security and welfare (Hilgert and Hogarth, 2003). What is more, in accordance to behavioral economics, psychology plays a significant role in the financial and economic decisions made within the household. For instance, consumers with a great amount of money will spend less as compared to consumers with smaller amounts. The same case applies to individuals that spend more money in a current account as compared to money in a savings account. Mental budgets are linked to the end point, which is the spending or saving of the money. In this constricted perspective, mental accounting is referred to as mental budgeting and is deemed to encroach upon the supposition of the fungibility of money (Antonides et al., 2011).

This research paper will take into account Arab students who study abroad. It is imperative to note that there is a distinctive difference between Arabian and overseas cultures. This has an influence on how they deal with bank interest. Islamic law precludes Muslims from paying or receiving any interest accrued on debt. The belief in Islamic law is that Muslims ought to sustain economic harmony in all kinds of financial transactions. Therefore, it is not acceptable for a wealthy and affluent individual to benefit from loaning money to a less privileged individual. In turn, this belief can have an adverse impact on how Muslims finance their education, cars, houses, and the manner in which they pay bills and how they use credit cards (Abdirizak, 2016).

Literature Review

Thaler (1999) describes mental accounting as the set of perceptive operations utilized by individuals and households to organize, assess and keep up with financial activities. The author makes the assumption that individuals have the perception of results in terms of value function, where the incremental change from the orientation point determines ensuing selections. By large, Thaler (1999) asserts that the role played by the value function in mental accounting is to delineate the manner in which events are observed and implied when making decisions. What is more, the author lays emphasis that every element of mental bookkeeping intrudes upon the economic standard of fungibility, implying that individuals discriminate money in relation to which mental account money is stored.

Stuck Writing Your "Psychology, Financial Decision-Making, and Management of Household" Essay?

As a result, Thaler (1999) states that mental accounting influences choice.

Cheema and Soman (2006) outline that mental accounting can be delineated as a perceptive kind of accounting and a set of rules to keep up-to-date with expenses. It aids individuals in controlling their level of consumption. The authors examine malleable mental accounting, which encompasses flexibility in categorizing ambiguous expenses. It also encompasses flexibility in forming mental accounts to accommodate uncategorized expenses. This permits consumers to make their justifications of attractive spending prospects. The first experiment of the study asks participants to rate the likelihood of having either an unambiguous expense or a more ambiguous expense and how well the expense is categorized into either category. Results indicated that when the expense is ambiguous, individuals apportioned it to whichever account had surplus finances. Participants made the most of the flexibility in the accounts, facilitating them to categorize and justify the expense. In general, the research study indicated that individuals are more likely to spend when they form the accounted after considering the ambiguous expense. What is more, participants form accounts in a manner that vindicated the expense. The inference is that where there is ambiguity in an individual's mental account, there is an opportunity for creative accounting.

According to Heath and Soll (1996), consumers set budgets for categories of expenses and go on to track them against the budget they have set. Taking into account that budgets are not able to expect consumption prospects precisely, individuals might earmark excessive money or less money for a certain category. In particular, this causes the consumers to under consume or over consume products in that particular category. The authors indicate that consumers set budgets that amount to under consumption. In addition, to demonstrate that consumers track their expenses and costs, the authors outline that budgeting effects are greater for buys that are largely characteristic of their category. These buys reduce the amount consumers spend in a category and hinders the ability to buy other typical products. Comment by babyliza: Not referenced

Brendl et al. (1998) put forward that mental accounting is a manifestation of a significant self-regulatory approach. The authors assert that separate mental accounts are organized on active objectives that can be detailed or abstract and continuous objectives. In addition, Thaler (1999) exemplifies the self-control structures of mental accounts, and he defines that distributing spending into budget groupings enables sensible interchanges. The author labels money into accounts at three levels. First, expenditures are clustered into budgets for food and housing. Second, wealth is apportioned into accounts of savings, pension, and emergency days. Lastly, income is separated into groupings for example regular or bonus.

Hypothesis (4) please explain them in detail (important thing in this paper it's all about the hypothesis) for 2 pages

The main purpose of this research study is to understand the psychology of decision-making and management of households with respect to Arab students living abroad. The study will take into consideration the impact of the difference in culture and also the influence of such culture in dealing with bank interest. For the purpose of this study, the researcher has developed a series of questions, which will serve as a guide to facilitate the course of the discussion. In particular, these research questions are aimed at generating an understanding of the influence of psychology on financial decision-making and the management of households. These questions are as follows:

Q1. How does the construction of accounts have an impact on spending and financial decision-making for the students?

Q2. How does the belief and adherence to Islamic law….....

Show More ⇣

     Open the full completed essay and source list


     Order a one-of-a-kind custom essay on this topic


Abdirizak, S. J. (2016). Beliefs and Banking. Allied Media Corp. Retrieved from:

Antonides, G., de Groot, I. M., & van Raaij, W. F. (2011). Mental budgeting and the management of household finance. Journal of Economic Psychology, 32(4), 546-555.

Brendl, C. M., Markman, A. B., & Higgins, E. T. (1998). Mental accounting as self-regulation: Representativeness to goal-derived categories. Zeitschrift Fur Sozialpsychologie, 29(2), 89-104.

Cheema, A., & Soman, D. (2006). Malleable mental accounting: The effect of flexibility on the justification of attractive spending and consumption decisions. Journal of Consumer Psychology, 16(1), 33-44.

Heath, C., & Soll, J. B. (1996). Mental budgeting and consumer decisions. Journal of consumer research, 23(1), 40-52.

Hilgert, M. A., Hogarth, J. M., & Beverly, S. G. (2003). Household financial management: The connection between knowledge and behavior. Fed. Res. Bull., 89, 309.

MacKinnon, D. P. (2011). Integrating mediators and moderators in research design. Research on Social Work Practice, 21(6), 675-681.

Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral decision-making, 12(3), 183.

Cite This Resource:

Latest APA Format (6th edition)

Copy Reference
"Psychology Financial Decision-Making And Management Of Household" (2016, December 11) Retrieved June 3, 2020, from

Latest MLA Format (8th edition)

Copy Reference
"Psychology Financial Decision-Making And Management Of Household" 11 December 2016. Web.3 June. 2020. <>

Latest Chicago Format (16th edition)

Copy Reference
"Psychology Financial Decision-Making And Management Of Household", 11 December 2016, Accessed.3 June. 2020,