Financial Decisions in Context: How Social Influence, Imagination, and Income Volatility Shape Choice

How does context shape financial decision-making? Classical economic theories assume that people have stable, internally consistent preferences. However, decades of research in psychology and behavioral economics suggest otherwise: even people’s everyday financial decisions, such as whether to spend or save, indulge or abstain, are shaped by the context in which they occur. This dissertation explores how social influence, imagination, and income volatility impact the financial decisions people make. Chapter 2 examines how observing others’ financial decisions influences people’s own. Across four studies, I find that people’s patience shifts in the direction of the influencers’, even when the choice sets they face are distinct from those faced by the influencers, suggesting that knowledge of others’ decisions reshapes how people fundamentally value future rewards. Chapter 3 investigates how spontaneous future imagination shapes the financial decisions people make on behalf of others. Using a combination of behavioral, neuroimaging, and computational modeling approaches, I find that people make more patient decisions on behalf of members of social groups whose far (versus near) future they imagine more vividly. Chapter 4 examines the impact of income volatility on people’s subjective wealth and financial decisions. Evidence from two large-scale datasets and a series of experiments shows that higher income volatility lowers people’s subjective wealth, which in turn influences their spending, saving, and donation behavior. Together, these chapters show how specific aspects of context shape everyday financial decisions and uncover the psychological mechanisms behind these effects.