Decision MakingDecision MakingPersonal FinancePersonal Finance

Mr. TuminoMr. Tumino

Basic Economic PrinciplesBasic Economic Principles

People choose because of limited resources. People choose because of limited resources. People’s choices involve costs. People’s choices involve costs. People respond to incentives in predictable People respond to incentives in predictable

ways. ways. People create economic systems that People create economic systems that

influence individual choices and incentives.influence individual choices and incentives. People gain when they trade voluntarily People gain when they trade voluntarily People’s choices have consequences that lie People’s choices have consequences that lie

in the future in the future

The Decision-Making The Decision-Making ProcessProcess

Identify the problemIdentify the problem

Gather information and list possible Gather information and list possible

alternativesalternatives

Consider consequences of each alternativeConsider consequences of each alternative

Select the best course of actionSelect the best course of action

Evaluate the resultsEvaluate the results

Factors that canFactors that canInfluence a Decision Influence a Decision

A.A. ValuesValuesWhat is important to your family, others in your What is important to your family, others in your culture?culture?

B. B. PeersPeersPeople you knowPeople you knowPressure for positive or negative behaviorsPressure for positive or negative behaviors

C. C. HabitsHabitsYou are accustomed to doing it this wayYou are accustomed to doing it this way

D. D. FeelingsFeelings (love, anger, frustration, ambivalence, (love, anger, frustration, ambivalence, rejection)rejection)

If you do make a certain decisionIf you do make a certain decision If you don’t make a certain decisionIf you don’t make a certain decision

E. E. FamilyFamily Your family’s preferenceYour family’s preference Decisions other family members have madeDecisions other family members have made

F. F. Risks and consequencesRisks and consequences What (or how much) you stand to winWhat (or how much) you stand to win What (or how much) you stand to loseWhat (or how much) you stand to lose

G. G. AgeAge MinorMinor AdultAdult

Factors that canFactors that canInfluence a Decision Influence a Decision

Common Decision-Making Common Decision-Making StrategiesStrategies

spontaneityspontaneityChoosing the first option that comes to mind; giving Choosing the first option that comes to mind; giving little or no consideration to the consequences of the little or no consideration to the consequences of the choice.choice.

compliancecomplianceGoing along with family, school, work, or peer Going along with family, school, work, or peer expectations.expectations.

procrastinationprocrastinationPostponing thought and action until options are Postponing thought and action until options are limited.limited.

Common Decision-Making Common Decision-Making StrategiesStrategies

agonizingagonizingAccumulating so much information that analyzing the Accumulating so much information that analyzing the options becomes overwhelming.options becomes overwhelming.

intentionintentionChoosing an option that will be both intellectually and Choosing an option that will be both intellectually and emotionally satisfying.emotionally satisfying.

desiredesireChoosing the option that might achieve the best result, Choosing the option that might achieve the best result, regardless of the risk involved.regardless of the risk involved.

avoidanceavoidanceChoosing the option that is most likely to avoid the Choosing the option that is most likely to avoid the

worst possible result.worst possible result.

securitysecurityChoosing the option that will bring some success, Choosing the option that will bring some success,

offend the fewest people, and pose the least risk.offend the fewest people, and pose the least risk.

synthesissynthesisChoosing the option that has a good chance to Choosing the option that has a good chance to

succeed and which you like the best.succeed and which you like the best.

Common Decision-Making Common Decision-Making StrategiesStrategies

T-ChartT-ChartPros Cons

Using a T-chart to list pros and cons related to decisions can help make

the decision making process simple.

Choosing Brand Name Jeans Choosing Brand Name Jeans Over No-Name JeansOver No-Name JeansProsPros ConsCons

Better Fit Cost More

Popular people will notice me.

I will look just like everyone

else.Feel better

about myself.I can only afford one

pair.

Economic Influences on Economic Influences on Decision-MakingDecision-Making

consumer pricesconsumer priceschanges in the buying power of the dollar, inflationchanges in the buying power of the dollar, inflation

consumer spendingconsumer spendingdemand for goods and servicesdemand for goods and services

gross domestic product (GDP)gross domestic product (GDP)total value of goods and services produced within the total value of goods and services produced within the

countrycountry

housing startshousing startsthe number of new homes being builtthe number of new homes being built

These economic factors may influence personal and financial These economic factors may influence personal and financial decisions:decisions:

Economic Influences on Economic Influences on Decision-MakingDecision-Making

interest ratesinterest ratesthe cost of borrowing moneythe cost of borrowing money

money supplymoney supplyfunds available for spending in the economyfunds available for spending in the economy

stock market indexstock market index(such as the Dow Jones Averages, Standard & Poor’s (such as the Dow Jones Averages, Standard & Poor’s

500)500)

indicate general trends in the value of U.S. stocksindicate general trends in the value of U.S. stocks

unemploymentunemploymentthe number of people without employment who are the number of people without employment who are

willing to willing to workwork

These economic factors may influence personal and financial These economic factors may influence personal and financial decisions:decisions:

Economic Influences on Economic Influences on Decision-MakingDecision-Making

interest ratesinterest ratesthe cost of borrowing moneythe cost of borrowing money

money supplymoney supplyfunds available for spending in the economyfunds available for spending in the economy

stock market indexstock market index(such as the Dow Jones Averages, Standard & Poor’s (such as the Dow Jones Averages, Standard & Poor’s

500)500)

indicate general trends in the value of U.S. stocksindicate general trends in the value of U.S. stocks

unemploymentunemploymentthe number of people without employment who are the number of people without employment who are

willing to willing to workwork

These economic factors may influence personal and financial These economic factors may influence personal and financial decisions:decisions:

Risks Associated with Decision-Risks Associated with Decision-MakingMaking

personal riskspersonal risksfactors that may create a less than desirable situation. Personal risk may be factors that may create a less than desirable situation. Personal risk may be in the form of inconvenience, embarrassment, safety, orin the form of inconvenience, embarrassment, safety, or

health concerns.health concerns.

inflation riskinflation riskrising prices cause lower buying power. Buying an item later may mean a rising prices cause lower buying power. Buying an item later may mean a higher price.higher price.

interest-rate riskinterest-rate riskchanging interest rates affect your costs (when borrowing) and your changing interest rates affect your costs (when borrowing) and your benefits (when saving or investing).benefits (when saving or investing).

Risks are associated with every decision. The Risks are associated with every decision. The following are common risks related to personal and following are common risks related to personal and financial decision making:financial decision making:

Risks Associated with Decision-Risks Associated with Decision-MakingMaking

Risks are associated with every decision. The Risks are associated with every decision. The following are common risks related to personal and following are common risks related to personal and financial decision making:financial decision making:

income riskincome riskchanging jobs or reduced spending by consumers can changing jobs or reduced spending by consumers can result in a lower income or loss of one’s employment. result in a lower income or loss of one’s employment. Career changes or job loss can result in a lower income Career changes or job loss can result in a lower income and reduced buying power.and reduced buying power.

liquidity riskliquidity riskcertain types of savings (certificates of deposit) and certain types of savings (certificates of deposit) and investments (real estate) may be difficult to convert to investments (real estate) may be difficult to convert to cash quickly.cash quickly.

Opportunity CostsOpportunity Costs

opportunity costopportunity cost

refers to what a person gives up when a decision is made. refers to what a person gives up when a decision is made. This cost, also called a trade-off, may involve one or more This cost, also called a trade-off, may involve one or more of your resources (time, money, and effort).of your resources (time, money, and effort).

personal opportunity costspersonal opportunity costs

may involve time, health, or energy. For example, time may involve time, health, or energy. For example, time spent on studying usually means lost time for leisure or spent on studying usually means lost time for leisure or working. However, this trade-off may be appropriate since working. However, this trade-off may be appropriate since your learning and grades will likely improve.your learning and grades will likely improve.

financial opportunity costsfinancial opportunity costs

involve monetary values of decisions made. For example, involve monetary values of decisions made. For example, the purchase of an item with money from your savings the purchase of an item with money from your savings means you will no longer obtain interest on those funds. means you will no longer obtain interest on those funds.

Time Value of MoneyTime Value of Money

time value of moneytime value of money can be used to measure can be used to measure financial opportunity costs using interest calculations.financial opportunity costs using interest calculations.

For exampleFor example: spending $1,000 from a savings account : spending $1,000 from a savings account paying 4% a year means an opportunity cost of $40 in lost paying 4% a year means an opportunity cost of $40 in lost interest.interest.

Calculations: $1,000 x .04 (4%) x 1 year = $40Calculations: $1,000 x .04 (4%) x 1 year = $40

Over 10 years, that $40 a year (saved at 4%) would have a Over 10 years, that $40 a year (saved at 4%) would have a value of $480 when taking into account compound value of $480 when taking into account compound interest.interest.

Forms of Peer Pressure as it Forms of Peer Pressure as it Relates to Purchasing Relates to Purchasing

DecisionsDecisions FriendsFriends NewspapersNewspapers MagazinesMagazines Telephone Telephone

DirectoriesDirectories

Direct MailDirect Mail CommercialsCommercials CatalogsCatalogs Radio Radio

AdvertisementsAdvertisements

Marketing, Advertising & Marketing, Advertising & Sales StrategiesSales Strategies

People who sell products People who sell products and services are fishing for and services are fishing for

customers. They lure customers. They lure them in with sales, them in with sales, coupons, and other coupons, and other

enticements. Unlike fish, enticements. Unlike fish, consumers can benefit in consumers can benefit in

this situation – if they this situation – if they know how to take know how to take

advantage of special advantage of special purchasing opportunities.purchasing opportunities.

Examples of Marketing, Examples of Marketing, Advertising & Sales Advertising & Sales

StrategiesStrategies Clearance SalesClearance Sales Holiday SalesHoliday Sales CouponsCoupons RebatesRebates SweepstakesSweepstakes ContestsContests Sales PeopleSales People

Attractive DécorAttractive Décor Background MusicBackground Music Items purchased Items purchased

most often are in most often are in back of store back of store (bread/milk)(bread/milk)

Most profitable Most profitable items are given items are given prominent prominent positions.positions.