The Implications of Culture on Behavioral Finance

Posted by Admin on Mar 6, 2016 5:00:00 PM

The TED Radio Hour’s broadcast “The Money Paradox,” covers some great material on the impact of language and culture on behavioral finance. This topic fascinates me thanks in part to my day job: As IMCA’s education and product development manager, I was closely involved with defining the content in our new Applied Behavioral Finance certificate program. Here are a few of my takeaways from the broadcast and some interesting examples of just how closely culture and behavioral finance are intertwined.

Language significantly impacts how people think about money—and maybe even their health. For example, people who primarily speak a language that doesn’t distinguish between present and future tense, such as Chinese, are significantly more likely to save money, according to Keith Chen, a behavioral economist. These individuals are also healthier, reporting lower rates of smoking or obesity in retirement. People with English as a primary language, on the other hand, tend to struggle more to save or make choices that delay gratification to support a future goal, because they find it more difficult to concretely imagine a future self. The abstract needs of a future self are never as persuasive as the concrete desires of a present self, to speakers of such languages.

In the IMCA Applied Behavioral Finance course, Meir Statman discusses these cultural differences. His research emphasizes the difference between individualistic and collectivistic cultures, and how typical assumptions in U.S. financial planning (such as how clients support relatives financially) are less relevant to people with a more collectivistic cultural heritage. In the United States, for example, it is common for people to save for their children’s educations and possibly the support of an elderly parent. In collectivistic cultures, individuals often provide for grandparents, aunts, uncles, siblings, nieces, nephews, and grandchildren as well. The implications for saving and spending over a lifetime are significantly different across cultures; advisors must factor these differences into client conversations.

These two examples underscore the fact that behavioral finance is an increasingly important and growing field of study. Staying current on the latest research and developments can offer great opportunities for enhanced relationships—and the chance to establish higher levels of trust and credibility—with your clients.

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