Factors influencing individuals’ decision-making and causing financial crisis
Abstract
It is essential to look at financial crises from both theoretical and practical aspects, as this is an old and recurring phenomenon. However, it is still unknown how to manage their formation. The article aims at assessing the influence of individuals’ financial decisions on financial crisis formation. The interface between economic decisions made by individuals and financial crises is assessed using expert evaluation method. The multi-criteria estimation performed using the TOPSIS method to evaluate when individuals make the most irrational decisions. Moreover, finally, economic decisions rationality index is concluded, evaluating when individuals make ridiculous decisions. The rationality index of economic decisions measures the number of irrational decisions during the economic expansion. Economic decisions rationality index divided into three groups: economic factors, financial sector and psychological factors. Assessment of the irrational decisions made during the economic expansion demonstrates that during the first period (2001–2006) the least irrational decisions were made in 2001 and the most in 2004; while during the second period (2010–2017), the least irrational decisions were made in 2011 and the most in 2015. The limitation of the research is that the data is accessible only for the US; hence, the results could differ in other countries.
Keyword : financial crisis, multi-criteria decision-making methods (MCDM), technique for order of preference by similarity to ideal solution (TOPSIS), economic decisions rationality index
How to Cite
Jurevičienė, D., Skvarciany, V., & Lagunavičiūtė, A. (2020). Factors influencing individuals’ decision-making and causing financial crisis. Journal of Business Economics and Management, 21(4), 1149-1164. https://doi.org/10.3846/jbem.2020.12890
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Allen, F., & Gale, D. (2007). Understanding financial crises. Oxford University Press. https://doi.org/10.4337/9781785366468
Anastasiu, D. M. (2017). Behavioural finance: Providing a Helping hand in understanding individuals financial behavioural. International Journal of Academic Research in Accounting, Finance and Management Sciences, 7(4), 128–133. https://doi.org/10.6007/IJARAFMS/v7-i4/3443
Annicchiarico, B., Surricchio, S., & Waldmann, R. J. (2019). A behavioral model of the credit cycle. Journal of Economic Behavior & Organization, 166, 53–83. https://doi.org/10.1016/j.jebo.2019.09.010
Arianti, B. F. (2018). The influence of financial literacy, financial behavior and income on investment decision. Economics and Accounting Journal, 1(1), 1–10.
Askari, M., Shirazi, H., & Aghababaei Samani, K. (2018). Dynamics of financial crises in the world trade network. Physica A: Statistical Mechanics and its Applications, 501, 164–169. https://doi.org/10.1016/j.physa.2018.02.153
Augustinaitis, A., Rudzkienė, V., Petrauskas, R. A., Dagytė, I., Martinaitytė, E., Leichteris, E., Malinauskienė, E., Višnevska, V., & Žalionienė, I. (2009). Lietuvos e. valdžios gairės: ateities įžvalgų tyrimas. Mykolas Romeris University. https://bit.ly/2W7eL7k
Azbainis, V. (2013). Finansų krizių teorija. Iš I. Mačerinskienė (Sud.), Finansų rinkų įžvalgos (p. 402– 450). Mykolo Romerio universitetas.
Baležentis, A., & Žalimaitė, M. (2011). Ekspertinių vertinimų taikymas inovacijų plėtros veiksnių analizėje: Lietuvos inovatyvių įmonių vertinimas. Management Theory and Studies for Rural Business and Infrastructure Development, 3(27), 23–31. http://mts.asu.lt/mtsrbid/article/viewFile/269/298
Claessens, S., Kose, M. A., Laeven, L., & Valencia, F. (2013). Understanding Financial crises: Causes, consequences, and policy responses. (Working Paper No. 1301). Koç University-TÜSİAD Economic Research Forum (ERF), Istanbul. https://doi.org/10.2139/ssrn.2295199
Cristófoli, M. E., & García Fronti, J. (2020). Stress Test Bancarios: selección de indicadores claves para la estabilidad financiera. Cuadernos de Economía, 43(121), 63–78. https://doi.org/10.32826/cude.v43i121.116
Czech National Bank. (2012). Financial Stability Report 2012. Central Bank of Bahrain.
De Bondt, W. F., & Thaler, R. (1994). Financial decision-making in markets and firms: A behavioral perspective. National Bureau of Economic Research. https://doi.org/10.3386/w4777
Dwumfour, R. A., & Addy, N. A. (2019). Interest rate and exchange rate exposure of portfolio stock returns: Does the financial crisis matter? Journal of African Business, 20(3), 339–357. https://doi.org/10.1080/15228916.2019.1583977
Eichengreen, B., & Wyplosz, C. (1998). The Stability Pact: more than a minor nuisance? Economic Policy, 13(26), 65–113. https://doi.org/10.1111/1468-0327.00029
Federal Reserve Bank of St. Louis. (2020). CBOE Volatility Index: VIX (VIXCLS). https://fred.stlouisfed.org/series/VIXCLS
Frankel, J., & Saravelos, G. (2012). Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis. Journal of International Economics, 87(2), 216–231. https://doi.org/10.1016/j.jinteco.2011.12.009
Gendron, Y., & Smith-Lacroix, J.-H. (2015). The global financial crisis: Essay on the possibility of substantive change in the discipline of finance. Critical Perspectives on Accounting, 30, 83–101. https://doi.org/10.1016/j.cpa.2013.09.002
Gennaioli, N., Shleifer, A., & Vishny, R. (2015). Neglected risks: The psychology of financial crises (NBER Working Paper No. 20875). National Bureau of Economic Research. https://doi.org/10.3386/w20875
Gerrans, P., Faff, R., & Hartnett, N. (2013). Individual financial risk tolerance and the global financial crisis. Accounting & Finance, 55(1), 165–185. https://doi.org/10.1111/acfi.12053
Hahm, J.-H., & Mishkin, F. S. (2000). The Korean financial crisis: An asymmetric information perspective. Emerging Markets Review, 1(1), 21–52. https://doi.org/10.1016/S1566-0141(00)00003-0
Hira, A. (2013). Irrational exuberance: An evolutionary perspective on the underlying causes of the financial crisis. Intereconomics, 48(2), 116–123. https://doi.org/10.1007/s10272-013-0452-0
Kraujalienė, L. (2019). Comparative analysis of multicriteria decision-making methods evaluating the efficiency of technology transfer. Business, Management and Education, 17, 72–93. https://doi.org/10.3846/bme.2019.11014
Legendre, P. (2005). Species associations: The Kendall coefficient of concordance revisited. Journal of Agricultural, Biological, and Environmental Statistics, 10(2), 226–245. https://doi.org/10.1198/108571105X46642
Mamun, A. (2017). An investigation of the factors causing financial crisis: Lessons from recent overwhelming episodes. Journal of Academic Research in Economics (JARE), 9(1), 7–18.
Marozzi, M. (2014). Testing for concordance between several criteria. Journal of Statistical Computation and Simulation, 84(9), 1843–1850. https://doi.org/10.1080/00949655.2013.766189
Mishkin, F. S. (1999). Global financial instability: Framework, events, issues. Journal of Economic Perspectives, 13(4), 3–20. https://doi.org/10.1257/jep.13.4.3
OECD. (2019). Average annual wages OECD. https://bit.ly/3eUeNYG
Petach, L. (2020). Local financialisation, household debt, and the great recession. Papers in Regional Science. https://doi.org/10.1111/pirs.12505
Purica, I. (2015). Evolution of financial crises. In Nonlinear Dynamics of Financial Crises (pp. 9–21). Elsevier. https://doi.org/10.1016/B978-0-12-803275-6.00002-1
Reinhart, C. M., & Felton, A. (2009). The first global financial crisis of the 21st century, Part II: Introduction. Centre for Economic Policy Research. www.cepr.org
Reinhart, C. M., & Rogoff, K. S. (2009). The aftermath of financial crises. American Economic Review, 99(2), 466–472. https://doi.org/10.1257/aer.99.2.466
Ricciardi, V. (2017). The role of group psychology in behavioural finance: A research starting point for banking, economic, and financial historians. Decision Taking, Confidence and Risk Management in Banks from Early Modernity to the 20th Century (pp. 269–292). Springer International Publishing. https://doi.org/10.1007/978-3-319-42076-9_12
Sayim, M., & Rahman, H. (2015). The relationship between individual investor sentiment, stock return and volatility. International Journal of Emerging Markets, 10(3), 504–520. https://doi.org/10.1108/IJoEM-07-2012-0060
Shefrin, H., & Statman, M. (2011). Behavioral finance in the financial crisis: market efficiency, Minsky, and Keynes.
Summers, L. H. (2000). International financial crises: Causes, prevention, and cures. American Economic Review, 90(2), 1–16. https://doi.org/10.1257/aer.90.2.1
Swedbank. (2018). Rating. https://www.swedbank.com/investor-relations/debt-investor/rating/
Vriend, N. J. (1996). Rational behavior and economic theory. Journal of Economic Behavior and Organization (T. 29). https://doi.org/10.1016/0167-2681(95)00063-1
Weiß, G. N. F., Bostandzic, D., & Neumann, S. (2014). What factors drive systemic risk during international financial crises? Journal of Banking & Finance, 41, 78–96. https://doi.org/10.1016/j.jbankfin.2014.01.001
World Bank. (2019a). Domestic credit Provided by Financial Sector (% of GDP). World Bank. https://bit.ly/2yTjhOY
World Bank. (2019b). GDP (current US$) | Data. https://bit.ly/3bLmYVd
World Bank. (2019c). Inflation, consumer prices (annual %) | Data. https://bit.ly/2YcIEWh
World Bank. (2019d). Lending interest rate (%). World Bank Development Database. https://bit.ly/2y6hZQu
World Bank. (2019e). Unemployment, total (% of total labor force). https://bit.ly/2xWRVaA
Yurdakul, F. (2014). Factors that trigger financial crises: The case of Turkey. Procedia-Social and Behavioral Sciences, 109, 896–901. https://doi.org/10.1016/j.sbspro.2013.12.561
Zhang, D., & Broadstock, D. C. (2018). Global financial crisis and rising connectedness in the international commodity markets. International Review of Financial Analysis. https://doi.org/10.1016/j.irfa.2018.08.003