Over the past few years, Research Briefs have been published in The Standard with an intent to help practitioners become better consumers of research (O’Neill, 2016). The approach followed by most authors of Research Briefs has been to summarize a few research papers on a given topic, drawing out the key findings and implications, and presenting them in a manner that is easier for non-researchers to digest. This is certainly one approach for advancing research-based practices within the profession. However, being a “better” consumer of research means an individual must have some awareness and knowledge of the research process – the same way we might equate “good” consumers with those who have some knowledge of the products or services they intend to purchase. With that in mind, what follows is a discussion of some basic theoretical paradigms used in personal finance research, with examples taken from the Journal of Financial Counseling and Planning.

It is particularly important for practitioners to have an awareness of how theory operates in a research context because the implications reported by researchers generally are the product of results interpreted through the lens of theory. That is, theory provides the story – the reasons, the causes – for how various factors (e.g., demographics, personal preferences, household financial characteristics) affect some behavior of interest (e.g., credit card usage, student loan indebtedness, precautionary saving). Practitioners with an enhanced awareness of the theories being used to inform their profession will be better prepared to read and understand the research published in the Journal of Financial Counseling and Planning, and better prepared to engage with researchers at the annual AFCPE® Research and Training Symposiums – they will be better consumers of research, and better able to influence the research direction of academics.

Economic Theories of Consumer Behavior

Much of the early research concerning individuals and families is grounded in economic theories of consumer behavior. These theories have a long history of development and generally assume that individuals make choices that will bring them the most satisfaction (i.e., maximize utility). For example, Guillemette and Jurgenson (2017) used such a framework to explore whether receiving investment advice from a CFP® practitioner resulted in different investment choices compared to relying on advice from a stockbroker without fiduciary responsibility. Study participants were given a choice between a certain investment outcome of no gain or loss, and a risky outcome where they could either gain or lose money. Such a choice was presented to each study participant 48 times. In half of those instances, the participant was told to think of themselves as receiving advice from a CFP® practitioner; and for the other half they were told to think of themselves as receiving advice from a stockbroker who was not bound by a fiduciary duty to their clients. The researchers then counted the number of times, under each scenario, that respondents chose the risky rather than the certain outcome.

The theoretical premise of the study was that consumers make choices that provide them with the greatest benefits – in this case, the investment choice with the highest payoff. The complication for individuals (and in this case, the study participants) comes from the uncertain outcome associated with one of the investment choices. Finance students are often taught to deal with this by summing the products of each possible investment outcome by its probability of occurrence. Say, for example, that participants wanted to estimate the value of an investment with a 50% chance of winning $50,000 and a 50% chance of losing $20,000. The expected value would simply be calculated as:

50% x $50,000 + 50% x -$20,000 = $15,000

Now, say a consumer is presented with two investment choices: a certain gain of $15,000 or an uncertain outcome with a 50% chance of winning $50,000 and a 50% chance of losing $20,000.

Which investment should the investor choose?

A fundamental premise in consumer economics is that individuals behave as if they do the kind of math illustrated above, in which case the investor would realize that both investments have the same expected value of $15,000. However, while both investments have the same value, one is risk-free and the other is risky. Which should they choose now? Well, if the investor does not care one way or the other about risk (i.e., they are risk-neutral) then it does not matter. However, most investors are assumed to be risk-averse: since both investments have the same expected value, most people will choose the risk-free investment.

In this particular example the expected values of the risk-free and the risky investment were equal. But what if the risky investment choice actually had a higher expected value? Which choice would investors make then? The answer depends on how much higher is the value of the risky choice, and just how averse the investor is to risk. The investor will only accept the riskier investment if the return is sufficiently higher for them to warrant taking the additional risk.

Building on these foundational assumptions, Guillemette and Jurgenson (2017) hypothesized that consumers essentially discount the expected payoffs from risky investment choices if advice is provided by sources perceived as less than trustworthy. Participants were presented with a series of investment choices between a certain payoff and an uncertain payoff. For example, the participants were told that if they chose the certain payoff, they would win nothing, but also would not lose anything. The uncertain payoff, by contrast, could payout $50,000 but could also lose $20,000. Participants were then advised that a CFP(r) practitioner with a fiduciary responsibility estimated that, for the risky investment, the chance of winning was 50% and the chance of losing was 50%, making the mathematically expected value of the investment $15,000 as illustrated above.

In another round of the experiment, participants were given the same information, but told that a stockbroker without a fiduciary responsibility estimated the chances of winning and losing to be 50/50 for the risky investment. Mathematically, the expected value of the risky investment was still $15,000. So, if participants did not consider the trustworthiness of the source of investment advice, participants should have been just as likely to choose the risky investment when advice was received from the CFP(r) practitioner as when it was received from the stockbroker.  By contrast, Guillemette and Jurgenson (2017) hypothesized that if participants did consider the trustworthiness of the information sources, then when participants received advice from the stockbroker they would treat the payoff as if it had some value less than its mathematically calculated expected value of $15,000. As such, participants would treat the investment choice as if there was less benefit for taking on the risk, and would accordingly be less likely to choose the risky investment.

This is precisely what Guillemette and Jurgenson (2017) found: participants were more likely to accept the risky investment if the advice was received from a CFP® practitioner with fiduciary responsibilities than from a stockbroker without fiduciary responsibilities. In this way, participants acted as if they discounted or wrote-down the advice received from sources perceived as less trustworthy. The immediate implication for practice is that clients are more likely to value and act on advice received from practitioners who appear to have their clients’ best interests at heart. This helps validate in a scientific way what many practitioners have learned from personal experience: trust is key to the practitioner-client relationship.

Psychological Theories of Consumer Behavior

In about the mid-20th century, economists became more interested in using mathematical formulas to describe consumer behavior – an economist might assume that a consumer’s objective in life is to maximize their life satisfaction, which would be determined by a number of different factors. These relationships could be described by a mathematical function or formula, and then then calculus could be used to solve an objective function. The study by Hatcher (1997) provides an example of mathematics used in personal finance research.

The challenge with a mathematical approach is that an infinite number of variables could affect human behavior. To reduce this complexity, economists make various assumptions about the nature of consumers and factors that influence utility – this allows them to reduce the number of variables in their formulas. In making these assumptions, however, the complexity of real human decision-making is lost. Consequently, many common human behaviors – such as saving for emergencies while simultaneously making purchases with a credit card – are characterized as anomalies in the standard economic paradigm. That is, standard economic theory cannot explain why people do many things they commonly do.

Over the past few decades, some economists have questioned the validity of the standard paradigm and have made efforts to make economic theory more realistic. Researchers such as Daniel Kahneman (author of the popular book Thinking, Fast and Slow) and Amos Tversky—both psychologists—used psychological theories to explain why people often make choices that classical economists said they should not make. Richard Thaler, an American economist, has also contributed to this line of research, and it is notable that he attributed his winning of the 2017 Nobel Memorial Prize in Economic Sciences to essentially reintroducing real humans to the study of economics. It is this approach of integrating human psychology with economic frameworks that forms the body of research commonly called behavioral economics. An example of this approach to financial counseling and planning can be seen in the study conducted by Ammerman and MacDonald (2018) which used Thaler and Shefrin’s (1981) economic theory of self-control to explore how individuals’ future orientation (i.e., the degree to which someone thinks about the future consequences of their choices) affects their cash position.

However, whereas some personal finance researchers have adopted a behavioral economic paradigm, others have moved away from economic frameworks altogether and have embraced psychological and sociological models of consumer behavior. The transtheoretical model of behavior change is one non-economic theory that may be of particular interest to financial counselors and planners. The theory essentially states that individuals do not suddenly change their behaviors, but rather move through various stages of willingness and preparation to change (Prochaska, Johnson, & Lee, 1998). The implication is that a client will not change a financially destructive behavior until they believe that they need to change, believe that they can change, and believe they have the support systems and resources needed to make a change. Shockey and Seiling (2004) tested this theory of behavior change within the context of a financial education program.

Behavior change is a fundamental concern for financial practitioners and educators. Shockey and Seiling (2004) note that many financial literacy programs have been designed around cognitive theories of learning, which basically assume that if individuals have more knowledge then they will make better choices (e.g., save more and borrow less). But there is mounting evidence that simply imparting more knowledge to program participants does not necessarily result in lasting behavior change (Ammerman & Stueve, 2017). The transtheoretical model explains why this could be the case: simply gaining knowledge may not necessarily move participants from a stage of being interested in making a change to actually making the change.

Shockey and Seiling (2004) tested the idea that financial literacy programs help participants progress through the behavior change process. The researchers designed and delivered a financial education program intended to help individuals increase their savings. The program was delivered via four two-hour classes over a four-week period. Participants were surveyed before and after each class, and asked a number of questions to assess their readiness to engage in different strategies and behaviors. The researchers compared the pre-class readiness scores with the post-class scores, and employed the appropriate statistical analyses necessary to determine whether any improvement (i.e., increase in readiness) was due simply to chance. Results suggested that the program helped participants make progress in adopting new strategies and behaviors to save money. In some cases, participants were able to move from one stage to another – for example, moving from the stage where they feel ready to create a spending plan to the stage where they actually do it. Overall, the study provided some scientific evidence that financial education programs (or at least, the particular program used in this study) can help participants work toward making positive changes. The immediate implication for practitioners and educators is that clients need to be helped through the behavior change process – change may not be immediate, and it is also possible for clients to revert to old habits. Practitioners need to:

1. Help clients recognize that there is a need for change

2. Gather the resources and support needed to make the change

3. Coach and support clients through maintaining new habits.

Final Considerations

In summary, theory is one of the most important parts of a research project. The theory essentially provides the story for how different factors affect some outcome of interest. The purpose of research is to test those stories and see if they are supported by what we observe in the world around us. Human behavior is incredibly complex, and consequently, researchers have turned to a number of different theories from different disciplines to make sense of the choices people make.

In this Research Brief we have seen examples of economic and psychological theories used in personal finance research. But there are many other theories that are useful for exploring how and why people behave the way they do. Practitioners are who are interested in these theories should consider reading research published in the Journal of Financial Counseling and Planning. Beyond this, however, researchers need the insights of practitioners in order to develop and test new theories of financial behavior. Practitioners are encouraged to engage with researchers at the annual AFCPE® Research and Training Symposiums so that we can advance our field together and provide the best services to clients and their families.


Ammerman, D. A., & MacDonald, M. (2018). Future orientation and household financial asset liquidity. Journal of Financial Counseling and Planning, 29(1), 121-131.

Ammerman, D. A., & Stueve, C. (2017). Childhood financial socialization and financial fragility in adulthood. Paper presented at 2017 AFCPE® Research and Training Symposium, San Diego, CA.

Guillemette, M. A., & Jurgenson, J. B. (2017). The impact of financial advice certification on investment choices. Journal of Financial Counseling and Planning, 28(1), 129.

Hatcher, C. B. (1997). A model of desired wealth at retirement. Journal of Financial Counseling and Planning, 8(1), 57.

Kahneman, D. (2013). Thinking, fast and slow. New York, NY: Farrar, Straus, and Giroux.

O’Neill, B. (2016). Building the bridge from research to practice. The Standard, 34(1). Retrieved from http://afcpe.org/news-and-publications/the-standard/2016-1/building-the-bridge-from-research-to-practice

Prochaska, J., Johnson, S., & Lee, P. (1998). The transtheoretical model of behavior change. In S. Schumaker, E. Schron, J. Ockene & W. McBee (Eds.), The Handbook of Health Behavior Change, 2nd ed. New York, NY: Springer.

Shockey, S. S., & Seiling, S. B. (2004). Moving into action: Application of the transtheoretical model of behavior change to financial education. Journal of Financial Counseling and Planning, 15(1), 41.

Thaler, R. H., & Shefrin, H. M. (1981). An economic theory of self-control. Journal of Political Economy, 89(2), 392-406.

David Allen Ammerman is Assistant Professor of Finance at West Texas A&M University in Canyon, Texas. Allen earned his M.S. in Finance from Georgetown University and Ph.D. in Personal Financial Planning from Kansas State University.

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