Trust and Household Finance - Term Paper Example

Research has it that the enhancing of individual trust to the right amount can improve the well-being of household finance. 1.0 Introduction Recent statistics have brought it to light that more than a third of the American adults who are approaching their 50’s have no retirement plan. They have also shown that more than half of the households in the country do not own any stock. It is very important to know the determinants of decisions in household finance. This is essential in the management of debt.

This paper shows that trust is a major factor that affects the management of household finance. Trust is the fundamental confidence that is found in an individual towards others in return for something that was promised. A casual impact on trust is inflicted by an individual’s cultural background and early life experiences on the value of the trust. A trusting individual is many times more likely to put up investment in the financial markets in the belief that they will obtain a fair return on investment, and this encourages the individual to invest.

Trust should thus promote investments. Trust also promotes responsible borrowing since when an individual is trusting then he or she is also taken to be trustworthy. Trusting individuals are thus expected to make more real and financial investments, they are also expected to comply with the financial contracts that they enter and avoid on taking excess debts. Because of this, an individual will save more and have better management of debt and their net worth will increase. Negative financial outcomes can greatly affect an individual’s level of trust.

Trust has dynamic dimensions that arise from cultural influences and experiences in life. The extent, to which an individual trusts another, embodies in the core values that are inherited from family, religion, cultural and ethnic backgrounds, and are influenced by the individual’s life experiences and the characteristics of the community members whom the individual interacts with in life. This are called the non-economic factors of trust. Prior literature has had it that these non-economic aspects of trust play major roles in financial decision making, in households. 2.0 Motivation and Hypotheses 2.

1 Trust and Economic and Financial Decisions: Individual Level Evidence Research has shown that trust has appositive effect on the aggregate political and economic phenomena. It has shown that a higher level of trust in a region or nation is correlated with more economic investments and growth, less corruption and higher tax compliance among many other issues. Few studies have been carried out on the effect that trust has on the outcomes of the economy at the individual level (Jiang & Lim 1). Though these studies show that trust has a positive effect on the monetary and economic well-being of an individual, they fail to offer a comprehensive analysis of the effect that trust has on household finance.

None of these studies analyzes the effect of trust on debt management (Jiang & Lim 8). 2.2 Hypothesis Development Trust is very likely to play a role in economic activities where transactions take place over a given period and an individual need to rely on the future and the observable actions of other people, such as their saving and investment decisions (Jiang & Lim 2012). Prior studies have shown that individuals who have the aspect of trust participate more in the