Economic Psychology

ROB RANYARD is a freelance researcher and Visiting Professor affiliated to the Centre for Decision Research, University of Leeds, UK. He is the editor of A Handbook of Process Tracing Methods for Decision Research (2011) and has publishing articles in journals including The Journal of Economic Psychology. He is a well-known figure in the field, previously serving as treasurer of the International Association for Research in Economic Psychology (IAREP) and currently being the IAREP country representative for the UK.

Preface xv

Notes on Contributors xvii

Acknowledgements xxvii

PART 1 Fundamentals 1

Chapter 1 Introduction to Economic Psychology: The Science of Economic Mental Life and Behaviour 3
Rob Ranyard and Vera Rita de Mello Ferreira

1.1 Introduction 4

1.2 The emergence of the discipline 5

1.3 Research methods 10

1.4 Economic mental representations 11

1.5 Financial behaviour and economic activity 12

1.6 Life-span perspectives 13

1.7 Economic psychology and society 14

1.8 Summary 16

Note 16

Review questions 16

References 16

Further reading 18

Chapter 2 Theories of Economic Decision-Making: Value, Risk and Affect 19
Anton Kühberger and Michael Schulte-Mecklenbeck

2.1 Introduction 20

2.2 Value and utility 20

2.3 Risk and uncertainty 22

2.4 Developments based on Subjectively Expected Utility (SEU) 23

2.5 B eyond Utility-Based Theories 25

2.6 Hot Decisions 27

2.7 Summary 31

Review Questions 31

References 31

Further Reading 34

Chapter 3 Future-Oriented Decisions: Intertemporal Choice 35
Daniel Read and Marc Scholten

3.1 Introduction 36

3.2 Rational Intertemporal Choice 36

3.3 A nomalies in Intertemporal Choice 38

3.4 E xplaining Anomalies 41

3.5 Framing Effects 42

3.6 What Do We Care About When We Measure Intertemporal Choice? 44

3.7 Summary 45

Notes 46

Review Questions 46

References 47

Further Reading 50

Part 2 Research Methods 51

Chapter 4 Research Methods for Economic Psychology 53
Gerrit Antonides

4.1 Introduction 54

4.2 Q ualitative Methods 55

4.3 Q uantitative Methods 58

4.4 Conclusion 63

4.5 Summary 64

Review Questions 64

References 64

Further Reading 68

Chapter 5 Assessing Psychological Dispositions and States that Can Influence Economic Behaviour 69
Simon McNair and W. Ray Crozier

5.1 Introduction 70

5.2 Psychological Dispositions and Economic Behaviour 71

5.3 Psychological States and Economic Behaviour 76

5.4 Methodological Issues in Assessing Dispositions and States 81

5.5 Summary 82

Notes 83

Review Questions 83

References 83

Further Reading 87

Chapter 6 Developing, Evaluating, and Using Subjective Scales of Personality, Preferences, and Well-Being: A Guide to Psychometrics for Psychologists and Economists 88
Alex M. Wood and Christopher J. Boyce

6.1 Introduction 89

6.2 The Importance of Psychometrics for Economic

Psychology Research 89

6.3 S teps in Developing a Scale 91

6.4 Other Steps and Conclusion 100

6.5 Summary 100

Note 100

Review Questions 101

References 101

Further Reading 103

Part 3 E conomic Mental Representations 105

Chapter 7 The Psychological Meaning of Money 107
Tomasz Zaleskiewicz, Agata Gasiorowska and Kathleen D. Vohs

7.1 Introduction 108

7.2 Money: Economic and Psychological Perspectives 108

7.3 Predictions 109

7.4 The Method of Money Priming: Akin to Getting a Taste of Big Money 111

7.5 Results 112

7.6 Summary 118

Acknowledgements 118

Review questions 118

References 119

Further Reading 121

Chapter 8 Mental Accounting and Economic Behaviour 123
Gerrit Antonides and Rob Ranyard

8.1 Introduction 124

8.2 B road Mental Accounts 124

8.3 Mental Accounts for Specific Financial Decisions 126

8.4 Other Categorizations of Money 127

8.5 Functions of Mental Accounts 129

8.6 D eterminants of Mental Accounting 133

8.7 Conclusion 134

8.8 Summary 135

Review Questions 135

References 136

Further Reading 138

Chapter 9 How Laypeople Understand the Economy 139
David Leiser and Zeev Krill

9.1 Introduction: Understanding Economics Is Hard Yet Expected 140

9.2 Interacting Variables 143

9.3 U sing Metaphors 147

9.4 Financial Literacy 149

9.5 Summary 150

Review Questions 151

References 151

Further Reading 154

Chapter 10 The Citizen’s Judgements of Prices and Inflation 155
Rob Ranyard, Fabio Del Missier, Nicolao Bonini and Davide Pietroni

10.1 Introduction 156

10.2 Price Evaluation 156

10.3 Inflation 161

10.4 Policy Implications 165

10.5 Summary 166

Notes 166

Review Questions 167

References 167

Further Reading 170

Chapter 11 Materialism and the Meanings of Possessions 171
W. Ray Crozier

11.1 Introduction: The Socio-Economic Context of Possessions and Materialism 172

11.2 The Psychological Meanings of Possessions 173

11.3 Psychological Aspects of Materialism 176

11.4 Materialism and Subjective Well-Being 178

11.5 Summary 182

Notes 183

Review Questions 183

References 183

Further Reading 185

Part 4 Financial Behaviour 187

Chapter 12 Defining and Influencing Financial Capability 189
Ivo Vlaev and Antony Elliott

12.1 Introduction 190

12.2 A New Conceptualization of Financial Capability 190

12.3 Ways to Influence Financial Capability 196

12.4 Conclusion 202

12.5 Summary 202

Notes 202

Review Questions 203

References 203

Further Reading 205

Chapter 13 Saving Behaviour: Economic and Psychological Approaches 206
Ellen K. Nyhus

13.1 Introduction 207

13.2 E conomic Perspectives 209

13.3 Psychological Approaches 211

13.4 Summary 217

Review Questions 218

References 218

Further Reading 221

Chapter 14 The Psychology of Borrowing and Over-Indebtedness 222
Rob Ranyard, Sandie McHugh and Simon McNair

14.1 Introduction 223

14.2 D eterminants of Borrowing 224

14.3 Credit Choice Processes 225

14.4 Repayment Strategies 228

14.5 Routes to Over-Indebtedness 229

14.6 Psychological Consequences of Debt 230

14.7 Policy Implications 231

14.8 Summary 233

Review Questions 234

References 234

Further Reading 238

Chapter 15 Behaviour in Financial Markets 239
Martin Hedesström

15.1 Introduction 240

15.2 D o Stocks Always Trade at the ‘Right’ Price? 240

15.3 Cognitive Influences on Investor Behaviour 242

15.4 E motional Influences 246

15.5 S ocial Influences 248

15.6 Policy Implications 250

15.7 Summary 250

Review Questions 250

References 251

Further Reading 254

Chapter 16 Tax Behaviour 255
Erich Kirchler and Erik Hoelzl

16.1 Introduction 256

16.2 Taxes and Tax Compliance 256

16.3 Tax Attitudes by Individual Taxpayers 258

16.4 Profit Shifting and Aggressive Tax Planning by Companies 260

16.5 Regulation Strategies by Tax Authorities 261

16.6 Interaction Climates Between Taxpayers and Tax Authorities 264

16.7 Practical Implications 267

16.8 Summary 268

Review Questions 268

References 268

Further Reading 271

PART 5 E conomic Activity 273

Chapter 17 Volunteer Organizations: Motivating with Awards 275
Bruno S. Frey and Jana Gallus

17.1 Introduction 276

17.2 Organizational Forms 276

17.3 A wards as Motivation 279

17.4 Conditions for Successfully Giving Awards to Volunteers 282

17.5 E ffects Of Awards on Performance 284

17.6 Summary 285

Review Questions 285

References 285

Further Reading 286

Chapter 18 Entrepreneurial Activity 287
Artur Domurat and Tadeusz Tyszka

18.1 Introduction 288

18.2 E nvironmental Factors and Entrepreneurship 289

18.3 Reasons for Engaging in Entrepreneurial Activity 290

18.4 Personality Characteristics of Entrepreneurs 292

18.5 Psychological Traps in Entrepreneurship 296

18.6 Teaching Entrepreneurship 297

18.7 Summary 299

Review Questions 300

References 300

Further Reading 303

Chapter 19 The Economic Psychology of Gambling 304
Juemin Xu and Nigel Harvey

19.1 Introduction 305

19.2 Lotteries 305

19.3 S cratch Cards 307

19.4 Roulette 307

19.5 Fruit Machines 309

19.6 S ports Betting 309

19.7 Card Games 311

19.8 Problem Gambling 312

19.9 Summary 314

Review Questions 314

References 314

Further Reading 318

PART 6 Life-Span Perspectives 319

Chapter 20 Economic Socialization: Childhood, Adolescence, and Early Adulthood 321
Annette Otto and Joyce Serido

20.1 Introduction 322

20.2 A Contextual Framework for Economic Behaviour Development 322

20.3 The Role of Parents in Economic Socialization 325

20.4 The Study of Economic Behaviour Development From Childhood Through Early Adulthood 327

20.5 Summary 331

Review Questions 331

References 331

Further Reading 336

Chapter 21 Childhood Psychological Predictors of Lifelong Economic Outcomes 337
Mark Egan, Michael Daly, and Liam Delaney

21.1 Introduction 338

21.2 Literature Review 338

21.3 Lifecourse Perspective 344

21.4 Methodological Challenges 346

21.5 Policy Implications 348

21.6 Conclusion 349

21.7 Summary 349

Notes 350

Review Questions 350

References 350

Further Reading 353

Chapter 22 The Economic Psychology of Financial Decision-Making and Money Management in the Household 354
Stefanie J. Sonnenberg

22.1 Introduction 355

22.2 Financial Decision-Making in the Household 356

22.3 Household Money Management 361

22.4 Conclusion 366

22.5 Summary 367

Notes 368

Review Questions 368

References 368

Further Reading 370

Chapter 23 Ageing and Economic Decision-Making 371
Wändi Bruine De Bruin

23.1 Introduction 372

23.2 The Role of Cognitive Deliberation in Decision Making 372

23.3 The Role of Experience-Based Knowledge in Decision-Making 373

23.4 The Role of Emotions in Decision-Making 374

23.5 The Role of Motivation and Strategies in Decision-Making 375

23.6 Interventions 376

23.7 D irections for Future Research 378

23.8 Summary 380

Acknowledgements 380

Review Questions 381

References 381

Further Reading 386

Part 7 Economic Psychology and Society 387

Chapter 24 Psychological Determinants of Charitable Giving 389
Tehila Kogut and Ilana Ritov

24.1 Introduction 390

24.2 D onation Decisions: Costs and Rewards 390

24.3 Causes that Elicit More Help 391

24.4 S pecific Individuals in Need 393

24.5 E ffectiveness and Impact 395

24.6 Who Helps – and When? 396

24.7 Main Research Methods in the Study of Charitable Giving 398

24.8 Future Research Directions 399

24.9 Summary 400

Review Questions 400

References 400

Further Reading 404

Chapter 25 Life Satisfaction and Emotional Well-Being: Psychological, Economic and Social Factors 405
Tommy Gärling and Amelie Gamble

25.1 Introduction 406

25.2 Views of Well-Being in Economics and Psychology 406

25.3 Measurement of Subjective Well-Being 407

25.4 Factors Influencing Subjective Well-Being 409

25.5 Consequences of Subjective Well-Being 415

25.6 Summary 417

Review Questions 417

References 417

Further Reading 420

Chapter 26 Living in Poverty: Understanding the Financial Behaviour of Vulnerable Groups 421
Cäzilia Loibl

26.1 Introduction 422

26.2 D efinition of Poverty 422

26.3 Characteristics of Financial Behaviours 423

26.4 Vulnerable Population Groups 427

26.5 Policy Implications 431

26.6 Summary 431

Review Questions 431

References 432

Further Reading 434

Chapter 27 Economic Psychology and Pro-Environmental Behaviour 435
Michel Handgraaf, Anouk Griffioen, Jan Willem Bolderdijkand John Thøgersen

27.1 Introduction 436

27.2 B ounded Rationality 437

27.3 The Environment as a Social Dilemma 441

27.4 Conclusion 444

27.5 Summary 445

Review Questions 446

References 446

Further Reading 450

Chapter 28 Insurance Behaviour and Society 451
Rob Ranyard, John K. Ashton and Bill Hebenton

28.1 Introduction 452

28.2 Insurance as Risk Protection 452

28.3 Mis-Selling 456

28.4 Insurance Fraud 459

28.5 Summary 462

Notes 463

Review Questions 463

References 463

Further Reading 467

Index 469