Financial Decision Making and Impact on Human Elements - Essay Example

Financial Decision Making and Impact on Human Elements: Introduction: On a daily basis, people are always forced to make decisions, whether they are small or big decisions. Piccirillo and Massimo (7) denote that having an understanding on the methods in which people and organizations area at their decision choices is an element of cognitive psychology that has widely received attention from scholars and policy makers. Piccirillo and Massimo (16) goes on to denote that a variety of theories have been developed for purposes of explaining the decision making process, and the various factors responsible for influencing the decision making process, both in the future, and present society. A variety of factors have been developed and found to play a great role in influencing an organization and an individual in the decision making process, these factors include the experiences of the decision makers, individual differences and age of the decision maker, cognitive biases, the intention and objectives of the decision under consideration, etc. On this basis, Nooraie (647) believes that having the capability of gaining an understanding of the various factors responsible for influencing the financial decision making process plays a great role in understanding the kind of decision that is made, and its impact on the human behavior. Heuristics is one of the frameworks developed that helps in providing an understanding on how financial decision making are made, with ease and quickly. A variety of heuristics have come into existence, with the main purpose of providing an explanation of a financial decision making process. Piccirillo and Massimo (39) denote that on most occasions, people and organizations will try to find ways of coming with good financial decision, and hence they have to follow a good decision making process. On this basis, scholar denotes that heuristics plays a great role in helping individuals to follow a general guideline on how to develop and make decisions. On this note, Piccirillo and Massimo (17) believe that factors playing a great role in the decision making process, and heuristics are very important aspects of critical thinking. Nooraie (641) concurs with this assertion and goes on to denote that it is very possible to teach decision makers and policy formulators on these factors, and this knowledge will play a great role in helping them to make appropriate and good decisions, especially financial decisions. Nooraie (643) asserts that people and organizations normally make a variety of decisions, and these decisions might include medical decisions, political decisions, career decisions, as well as financial decisions which on most occasions require an organization or an individual to make good and sound judgments. Piccirillo and Massimo (27) further assert that the process of decision making is always a reflection on a specific decision that an organization or an individual seeks to make. Some of the choices are always straight forward, and very simple, whereas other choices are always complex, and they need a multi-step approaches in the development of decisions. This research paper addresses the impacts of the financial decision making process, on the human element. In meeting the objectives of the paper, the researcher will have to analyze the financial decision making process and identify its impact on the human elements. This paper will also talk about heuristics, an important aspect in decision making, and also identify its impact on the human elements. This paper has a conclusion, which provides a summary of the impact of financial decision making, on human elements. Factors that Influence Financial Decision Making Process: Masood, Bora and Sahil (112) denotes that there exist a number of factors responsible for influencing a financial decision making process. The most significant factors would include cognitive biases, individual differences which includes social economic status, age, etc. These factors have a great influence on the process of making financial decision, as well as on the nature of the decision that has been arrived at. Past experience plays a significant role in determining the process of decision making. Masood, Bora and Sahil (113) denotes that the past experiences of policy formulators and managers play a great role in influencing the type of financial decision that they may take in the future. For instance, Masood, Bora and Sahil (116) explains that when a positive result emanates from a decision that they developed in the past, managers, policy makers as well as individuals will tend to use the same processes for purposes of coming with a decision. Lucarelli and Gianni (39) further believes that when a negative outcome emanates from a decision that decision makers came up with, then the same decision makers will tend to avoid the process used in deriving the decision under consideration. On this basis, decision makers will always seek to avoid making repeated mistakes. Lucarelli and Gianni (41) goes on to give an example of the decisions made in arriving at the merger between Daimler and Chrysler in 1998, as the main reasons leading to the failure of the merger. It was within the belief of the company that the merger will increase its financial position through increased profits, however, poor decision makings led to the failure of the merger. Masood, Bora and Sahil (117) denotes that due to poor decision making, Daimler was able to sale Chrysler at a price of 7.3 billion dollars in the year 2007; as opposed to 38 billion dollars the company was able to use in acquiring Chrysler in the year 1998. This was a massive loss of 31 billion dollars. Lucarelli and Gianni (24) therefore denotes that the managers of Daimler, in making future financial decisions, will always seek to avoid the mistakes they made while acquiring Chrysler. However, Lucarelli and Gianni (27) denotes that this is not the best approach for making decisions. This is because successful people do not make financial decisions based on their past experiences. These organizations and individuals will always examine the various choices that they have, and come up with a decision based on the best choice regarding an issue. Lucarelli and Gianni (29) further denotes that cognitive biases play a significant role in influencing the financial decision making process. Lucarelli and Gianni (32) defines cognitive biases as, a thinking pattern that is based on generalizations and observations which may lead to inaccurate judgments, memory errors, as well as faulty logic. Scholar further denotes that cognitive biases can include issues such as hindsight bias, belief bias, over reliance on prior knowledge to arrive at a decision, omissions, etc. In the financial decision making process, cognitive biases play a role in influencing decision makers to come up with a decision through over-reliance of previous knowledge, as well as expected observations. Using this method at arriving at a decision will also force the decision maker to dismiss information that is uncertain, without having a careful look into it. Masood, Bora and Sahil (110) denotes that using the principles of cognitive biases in arriving at a financial decision might always lead to an enactment of poor decisions. However, with the aid of heuristics, Masood, Bora and Sahil (112) denotes that decision makers might be able to come up with an efficient and good financial decision. Furthermore, scholar denotes that cognitive biases, and past experiences may come under the influence of sunk costs, as well as escalation of commitment. Scholar denotes that individuals and people may invest a large sum of money and time in decisions that they are committed to. Furthermore, decision makers will continue making risky decisions, if they feel that they are responsible for their money, time, sunk costs, as well as efforts spent on the project. On this basis, the financial decision that an individual or an organization might develop will greatly be influenced by the manner in which the organization or the individual under consideration is involved in the implementation of the decision under consideration. Masood, Bora and Sahil (118) further denotes that individual differences may play a great role in influencing financial decisions with an organization. These differences include age, cognitive abilities, as well as socio-economic status. Scholar denotes that manages who are aged, will always prefer to make few choices regarding financial decisions, as opposed to young managers. This is because they do not want to take a lot of risks, which may jeopardize their business or organizations. On the other hand, young managers are risk takers, and will always prefer a wide variety of investment decisions (Saaty and Luis, 37). Scholar denotes that it is because of the different experiences that these people have, that contribute to a great extent on the type of risks they intend to take. Generally, cognitive biases, past experiences, individual differences, and personal relevance play a great role in the financial decision making process. Institutions and organization will only develop a financial decision based on its relevance, and whether the decision under consideration will manage to achieve its outcome. On most occasions, institutions and individuals will be reluctant to come up with a financial decision, based on the perceived risks, and the expected negative outcome of the decision under consideration. For instance, banking institutions in the United States will be reluctant to offer cheap and high risk mortgages to the citizens of the United States, based on the past failure of such a system that led to the financial crisis of the 2007/2008. Furthermore, scholar believes that, when members of an organization are assured that they will play a significant role in the implementation of the financial decision, then chances are high that they will actively be involved in the decision making process. This in turn will result to the development of a decision that reflects the desires and aims of the decision makers under consideration. Heuristics and Financial Decision Making Process: Heuristics refers to the strategies that decision makers normally use, and they are guided through very little information, which on most occasions are always correct. Saaty and Luis (53) define heuristics as a mental short cut, responsible for reducing the cognitive burden that is associated with the process of decision making. Masood, Bora and Sahil (107) denotes that heuristics is responsible for reducing the financial decision making processes in a number of ways, and this is because the decision maker has the capability of effectively scrutinizing the alternative choices and few signals that are present for the decision maker to choose. Masood, Bora and Sahil (111) believes that the type of heuristics that is commonly used in the financial decision making process is the price heuristics. Under this type of heuristics, scholar denotes that decision makers normally view an item that is of higher price, to be of the higher quality, as compared to an item that is of lower price. On this basis, scholar denotes that people will on most occasion purchase products or make investment decisions based on the cost of the products, or the costs of the investment under consideration. For instance, when purchasing the shares of a company, shares with high values, is a representation that the company under consideration is stable, and highly profitable. Investors will therefore seek to buy such kind of shares. Furthermore, Saaty and Luis (51) denote that another financial heuristics is referred to as representative heuristics. Under this type of heuristics, financial decision makers will always choose to spend their money, on investments that they are aware of, at the expense of an investment which is new and not recognizable within the market. It is on this basis, that age usually plays a great role in determining the kind of investment or financial decision that an investor or an individual will make. Younger people are always keen on risk taking, and on this basis, organizations headed by young executives will tend to take risks, and invest their money on non-traditional investments. For instance the developed of social networking sites and e-commerce has always been initiated b y young executives who are always on their thirties and twenties. It is important to understand that e-commerce is a new method of doing in the 21st century (Masood, Bora and Sahil, 115). On the other hand, it is only the aged who is keen on the traditional methods of conducting business, which includes physical models of business transactions. The making of these new investments decisions is always based on the uncertainties of the outcomes, and hence makes it very risky. It is these risks that aged executives, as well as individuals usually want to avoid. Saaty and Luis (37) observes that when using representational heuristics, people will have to rely on additional information for purposes of coming up with a decision. This is because instincts alone is not enough, and hence the decision maker will have to search for other information that will supplement the information or idea he has for purposes of coming up with a good financial decision. Conclusion: When a financial decision is always made, people will have a variety of reactions. Some of the major outcomes of the decision developed include satisfaction, or even regret. Feelings of disappointment, regret, as well as dissatisfaction with the choice that decision makers enact are some of the possible outcomes of a financial decision making. It is important to understand that once a decision is made, chances are high that there will be some aspects of anticipated regrets from decision makers. Anticipated regret as a belief that a decision under consideration will lead to inaction. Anticipated regret may result into a prompt behavior. For example, when a company such as Apples wants to enlist its shares in the stock market, investors may rush to buy these shares, because of the expectations that the shares may increase in value. An investor who does not take the risks, and purchase the shares may regret later, when the shares under consideration increases in value. Furthermore, in case the regret occurs, this will greatly affect the future decisions of the investor, or the managers of an organization under consideration. People always feel regret based on the manner in which the decision under consideration was made. In proving this assertion, Nooraie (651) denotes that regret may occur, based on the number of options that was made available during the process of making decisions, and the manner in which these options varied. On this basis, scholar denotes that people and organizations will be regretful on the financial decision made, in case they feel that they could make a better decision through a critical analysis of more information that was previously ignored by the decision makers. Furthermore, an individual is able to portray regret when he or she revisits the other available options, and making a consideration of the kind of satisfaction that would be derived in case they followed the option under consideration. People who failed to take a decision, and thereafter regret taking such a decision, usually provide a justification of their failure to take the decision under consideration. This is for purposes of helping them to reduce anxiety. For instance, when an investor fails to acquire an investment, to reduce anxiety he or she will identify various reasons as to why he or she did not want to acquire the investment. Individuals can also derive satisfaction from the decisions arrived at. When an individual derives satisfaction, then chances are high that he or she is pleased with the decision that has been arrived at. Most individuals who normally derive satisfaction from decisions made, are always part and parcel of the decision making process. However, those who are not always satisfied with the decisions arrived at, normally are not involved in the decision making process, and hence they do not own the decision under consideration. Works Cited: Nooraie, Mahmood. "Decision Magnitude Of Impact And Strategic Decision-making Process Output: The Mediating Impact Of Rationality Of The Decision-making Process." Management Decision 46.4 (2008): 640-655. Print. Lucarelli, Caterina, and Gianni Brighetti. Risk tolerance in financial decision making. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan, 2011. Print. Masood, Omar, Bora Aktan, and Sahil Chaudhary. "The investment decision-making process from a risk managers perspective: a survey." Qualitative Research in Financial Markets 1.2 (2009): 106- 120. Print. Piccirillo, Ettore, and Massimo G. Noro. Guidebook for supporting decision making under uncertainties todays managers, tomorrows business. Hackensack, NJ: World Scientific, 2008. Print. Saaty, Thomas L., and Luis G. Vargas. Decision making with the analytic network process economic, political, social and technological applications with benefits, opportunities, costs and risks. New York: Springer, 2006. Print. Read More