Need: Consumers have been facing a multitude of financial pressures resulting from the 2008 global financial crisis. Home owners struggle with alarming levels of foreclosure while the collective student loan burden of $1 trillion has surpassed total credit card debt for the first time in history. Furthermore, aging baby boomers face the critically important decision of the optimal time to file for Social Security retirement benefits. Financial information is complicated and the majority of consumers feel that they lack the adequate knowledge and skills for obtaining and processing the information. In addition, consumers don't realize the influence that psychological factors have on their financial decisions. All of these factors complicate consumer financial decision-making across the life span. Home ownership has long been considered the American dream as well as a key vehicle to building wealth. Since the housing bubble burst, the home ownership rate has dropped from an historical high due to high foreclosure rates. According to Yellen (2011), only 15% of homeowners expect housing prices to increase over the next year, and barely half expect these prices to increase over the next five years. This is due largely to the fall in house prices and the sustained high rate of unemployment. In fact, approximately 4% of mortgages in the United States are currently in foreclosure. Additionally, in another 3% of mortgages, consumers have missed three or more payments (Yellen, 2011).

However, most Americans continue to believe that home ownership is still an essential part of the American dream. Understanding home ownership decisions and making informed financial choices regarding housing have become more critical than ever before. Buying a home is the single largest consumer financial decision that most households make but many consumers often feel that they do not understand the complex financing and housing choices, especially in the current economic conditions. For struggling home owners, refinancing is another important financial decision. With more opportunities to refinance their mortgage to reduce costs, according to the Agency Financial Report (2011), more education and outreach is needed to help consumers understand the process.

Funding education is another financial decision with life-long consequences. Growing education debt has been a problem for young consumers and their parents. According to the Consumer Financial Protection Bureau, student loan debt has surpassed the $1 trillion mark. While the U.S. Department of Education provides more than $150 million in federal student aid each year in the form of grants, work-study and loans for students seeking postsecondary education, approximately 14 million students currently receive federal student aid with the majority receiving federal student loans (Federal Student Aid, 2011). Many students borrow from private, non-governmental sources, on top of their subsidized federal loans. With the high rate of unemployment, the growing student loan burden can be a huge financial strain for many Americans. This can make it challenging to have sufficient cash flows to purchase a home, or even to purchase a car.

Retirement is another milestone that brings complicated financial decisions when deciding the ideal time to claim Social Security benefits. According to Boehner (2012), Social Security will play a critical role in the lives of 56 million beneficiaries and 159 million covered workers and their families in 2012 (Social Security Administration (2012). When to start Social Security benefits is a crucial financial decision for individual recipients that is far more complicated than most retirees understand. Workers are assigned a full retirement age based on their year of birth, with workers born in 1960 and later having to wait until 67 years old. However, workers can elect to take a reduced benefit at an earlier age, as early as age 62. The benefit is permanently reduced for each month benefits are collected prior to the full retirement age. Another important decision is the election of the spousal benefit. The timing and subsequently the level of the benefit will affect the financial well being of a person or couple for their remaining years. Social Security is the most important retirement income source, and accounted for 90% or more of total income for 36% of all beneficiaries in 2010.

In response to these concerns, this project was developed with a goal to better understand consumer financial decision-making across the lifespan. How consumers process information and make decisions regarding housing (rent vs. buy & mortgage), post-secondard education financing, and Social Security retirement will be examined. This research focus fits within the following Financial Literacy and Education Commissions (FLEC) 2012 Research priorities: Identify optimal combinations of financial information, advice, regulation, disclosure, and delivery mechanisms, including default options, and their impact on starting and maintaining positive financial habits, Identify, evaluate, and build consensus on key metrics for financial education/capability, including measures of knowledge, behaviors, and well-being. FLECs research priorities also include the optimal strategy combinations, including: "What is the most effective mix of financial education, decision framing, and regulation to improve financial well-being? "How does this mix vary across content, delivery channels, target audiences, etc.?" Is it possible to develop an overarching framework for thinking about combining these three approaches or must effective combinations of financial education, decision framing, and regulation be developed on a case by case basis? Importance: Simply providing consumers with information and education are necessary steps, yet not sufficient to address the problem of consumer decision- making in an increasingly complicated financial world. Behavioral economics/psychology research has shown that consumers often make irrational choices (Ariely, 2008; Thaler & Sunstein, 2008;). Consumers are faced with a plethora of information from a variety of sources that may be of questionable reliability. Despite vast sums spent worldwide, we find that interventions to improve financial literacy explain only minimal variance in subsequent financial behavior (Fernandes, Lynch & Netemeyer ,2012, p. 1). Numerous studies reveal that while Americans of all ages are financially illiterate, they overestimate their financial decision-making skills (Lusardi, 2010; 2011; Lusardi & Mitchell, 2008).

There is a pressing need to understand how American households make financial decisions, and to improve the financial decision-making skills of the American family. This research is well suited for a broader land-grant community educational and research priority. Building upon what we have learned about consumer financial socialization and the importance of psychological constructs in the saving decision, this new research fills an important gap in our understanding of the consumer financial decision-making process. The research is informed by the latest in behavioral economic theory and is being applied to improve the overall well-being of the American households.

The renewal of this project is also important for its potential contribution to the field of consumer economics. Our previous research and additional studies over the past two decades clearly show that psychological factors play a powerful role in influencing consumer decisions. While conventional consumer education focuses on providing rational consumers with information (i.e. Consumer Reports) to make optimal decisions, information management (the economics of information) research clearly shows that how consumers acquire and process information may not always be optimal.

There is a solid theoretical foundation upon which to build a long-term research agenda. Shefrin and Thaler (1988) developed the Behavioral Life Cycle (BLC) hypothesis to enrich the life cycle theory of saving by incorporating three psychological components: self-control, mental accounting, and framing. Basically Shefrin and Thaler (1988) modified the life cycle hypothesis (LCH) to make it more reflective of actual consumer behavior. Various studies (Kahneman & Tversky, 1979; Lee & Aaker, 2004; Rothman & Salovey, 1997) demonstrate that how a decision is presented or framed influences consumer decisions. Shefrin and Thalers model recognizes consumers decision-making process is influenced through the psychological principals of self-control, mental accounting, and framing. However, the process of how self-control, framing, and mental accounting work has not been explored sufficiently within the context of consumer decision-making. There is a need for research that recognizes how psychology influences important consumer decisions related to student loan debt, home buying, and when to collect Social Security retirement benefits. This study will examine how psychological factors like self-control, mental accounting, and framing influence decisions linked to housing, saving and when to start social security benefits. Identifying the heuristics specific to each of these three critical consumer decisions will help consumer educators and information providers to enhance the effectiveness of their messages. These interventions may lead to improved financial decision-making by consumers.

Our contribution to the Behavioral Life Cycle hypothesis will focus mainly on the area of information management. We know from previous studies that consumers vary in the extent to which they search for information. Particularly, information search for financial decision-making is associated with a high volume of shopping around due to the complex nature of the exercise (Bi, Montalto & Fox, 2002). Higher levels of income, risk tolerance, regular savings habits and a larger network of financial institutions are factors that have previously been found to be positively correlated with extensive amounts of information search for financial services (Lin & Lee, 2004; Yang & DeVaney, 2006). Age is inversely proportionate to search extent (Yang & DeVaney, 2006). The search for information is just one aspect of information management. Avoiding negative information is a common strategy among consumers across the lifespan and socioeconomic spectrum (Sweeny, Melnyk, Miller & Shepperd, 2010). Financial information avoidance, while arguably a behavior less frequently employed than information search, carries potentially severe financial consequences such as default-related fees and credit score depreciation. Empirical research is yet to be conducted on financial information avoidance. Thus, our contribution to the body of knowledge on this topic will be immediate and significant.

Non-economic psychological factors influence financial decisions. Kahneman (2011) describes some of these psychological factors with the use of two systems. System one reflects the impulsive, heuristic-driven distinctive decision maker; whereas System two describes the rational, logical, deliberative, analytical self. The consumer financial decision-making process seems to follow the law of conservation of mental energy; consumers tend to make decisions using heuristics, thereby using the least amount of mental energy. Further studies and exploration of what these heuristics are and how they are formed will lead to a better understanding of the consumer decision-making process. In particular, understanding how heuristics can be changed or replaced with more effective decision strategies could lead to improved financial well-being.

Technical Feasibility

The researchers will use an experimental design to examine how consumers make financial decisions. Using an experimental design based on scenarios helps to enhance internal and statistical conclusion validity by increasing control over the manipulated variables and reducing random, unmanageable variables (Jin & DeVaney, 2011).

Written scenarios will be developed to simulate the financial decisions. Subjects will be randomly assigned to one of the scenarios. The scenarios will be varied to manipulate factors that are frequently involved in decision making. The researchers will include constructs from information management (such as source of information, use vs. avoidance) and constructs from the BLC theory. For example, in a pilot study by a team member, the participants were assigned to one of two instruments. After ascertaining basic information including financial knowledge, preferences, and experiences with homeownership, participants were presented with two scenarios and asked to select the mortgage (Adjustable Rate Mortgage or Fixed Rate Mortgage) they would choose in that situation. However, in one instrument the participant also received a one-page explanation of the difference between an Adjustable Rate Mortgage and Fixed Rate Mortgage, including when one should choose one over the other. The team will utilize an Internet sampling firm to provide sufficient responses for the study. The firm would facilitate random assignment to the different scenarios.

Outcomes

Findings and implications will be reported to consumer educators including the extensive Cooperative Extension network. We also plan to present this research at appropriate conferences including: Association for Financial Counseling and Planning Education, American Council on Consumer Interests, Family Economics Resource Management Association, as well as others. We also will submit manuscripts to relevant journals including: The Journal of Consumer Affairs, Journal of Financial Counseling and Planning, Family and Consumer Sciences Research Journal, Journal of Family and Economic Issues, International Journal of Consumer Sciences, Journal of Economic Psychology, and other relevant journals in the field of consumer economic behavior.

Potential Impact

This project will assess barriers and motivators that influence the decision-making making process of consumers. Also, this project will continue to examine the effect of economic, psychological, and sociological factors on savings behavior. In summary, this project is an extension of NC 1172 which examined "The Complex Nature of Savings Behavior." However, the focus of this new project is on information management and financial decision-making. This proposal recognizes that consumers are increasingly influenced by the multiple sources of information that they receive on a daily basis.

This project is expected to result in a greater understanding of how consumers make financial decisions. The results should provide a foundation for developing, implementing, and evaluating educational initiatives to increase financial literacy and improve financial decision-making. It may also help to inform regulatory efforts.

Although educational programs delivered through the land-grant systems Cooperative Extension Service (CES) focus on the development of financial decision- making skills, educators have not addressed the underlying psychological factors such as anxiety, distrust, and self-efficacy that influence the decision-making process. Also, we anticipate that the results of this study will help educators include the sociological factors of family, peers, and the influence of social media in educational programs.

This project will result in a better understanding of how consumers use or avoid information and which sources of information are used and/or avoided by different sub-groups of consumers based on demographic and psychological factors. A better understanding of how consumers receive and process information in addition to the awareness of factors that were studied in NC 1172 (e.g., economic, psychological, and sociological factors) should lead to increased effectiveness of CES educational initiatives. Also, the results can be used to recommend public policy initiatives and suggest new or enhanced approaches for reaching consumers beyond traditional audiences.