Financial decisions are rarely made based solely on an objective look at the numbers. People are social creatures, and therefore social factors influence actions when it comes to handling and investing money. Businesses use techniques leveraging these tendencies to tailor their products and services to their target market.
Individuals often make financial decisions based in part on what their primary influence groups have done. For example, friends, family members, relatives and co-workers can influence a person's financial decision based on their own experiences. If someone's friends are in the market to buy houses, that may influence his own decision as to whether to buy or rent. To take advantage of this peer dynamic, businesses can reward existing customers for their referrals that lead to new customers.
Individual investors often follow the lead of larger groups, even when the decision may make little financial sense for them. For example, an investor might have previously had a set price-earnings ratio or comfort level that needed to be reached before investing in a certain stock. However, she might still participate in an Internet stock bubble that didn’t fall anywhere close to those benchmarks based on the theory that so many investors couldn't all be wrong. One way businesses exploit this herd behavior is by designing ad campaigns that emphasize the number of people who already patronize them. If a bank trumpets the amount of new customers it's getting, or an insurer touts the number of people saving money by switching to its products, that triggers the sense that anyone not doing the same thing is missing a great opportunity and can encourage them to follow suit.
Financial decisions may also be influenced by cultural norms. Some religions, for example, forbid or limit the amount of interest that can be charged on loans. Investors in those faiths therefore may find a religious objection to investing in organizations that make their money via interest charges. A culture that expects grown children to remain living at home until marriage likely will have a different housing market than a society that expects children to leave the house and find a place on their own as soon as possible. Financial agencies selling mortgage loans need to be aware of these differences when marketing their products.
Financial decisions can be impacted by an individual’s experience in financial markets, as well as those of that individual’s peer group. Groups with more money to spend and a more sophisticated knowledge of investment instruments have more access to capital than those from different socio-economic groups. Knowing the comfort level of a particular market is important in designing products and services that meet its needs.
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