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Decision Making

Overview

Students will learn to identify and analyze common decision-making strategies, as well as examine marketplace influences on consumer purchases.

 

Lesson Objective(s)

Identify and explain common decision-making strategies.

Predict the unintended consequences of financial decisions.

Analyze the impact media has on perceived needs and wants.

 

 

Decision Making Pre-Quiz

We each make hundreds of decisions per day. In fact, a study by Cornell University found that we make more than 200 daily decisions just about food. Lucky for us, roughly 95 percent of the decisions we make are done on autopilot. But using our subconscious to navigate personal finance issues may not be the best approach.

 

What is important during the teen years is to establish a foundation that will help you make informed financial decisions in the future. An informed decision is one that aligns with your goals and values, and enhances your ability to live a purposeful life. The choices you make may be different from those of your friends and family. But making choices that you can live with will result in better use of time, money, and other resources. When you are trying to make a decision, it may help to remember the acronym SMART. SMART decisions are: specific, measurable, attainable, realistic and timely.

 

How do people go about making decisions? The process can be broken down into these steps:

  1. Identify the problem
  2. Gather information
  3. List possible solutions
  4. Consider consequences of each possible solution or alternative
  5. Select the best course of action
  6. Evaluate the results

 

That all seems very tidy, doesn’t it? We don’t always sit down and make a list (though this can be helpful for bigger decisions), but most financial decisions requiring our conscious thought will involve these steps.

 

The study of economics also implies a rational framework for the consumer decisions that we make. The theory is that since we are rational beings we will weigh prices and options, we will balance needs and wants with resources, and then we will make balanced financial decisions.

 

More and more, however, researchers are exploring the field of behavioral economics, which considers that people make choices based on other factors such as emotions and intuition. We care what peers think, and our moods and values factor into many decisions. Sometimes we simply make impulse purchases.

 

There are outside factors exerting pressure on our decision making as well. Talk of a recession may encourage us to delay spending on big ticket items. For example, if your dad is concerned that he may lose his job or have his benefits cut back, your family may choose to stay home rather than take a vacation this summer.

 

Opportunity costs are also involved in every decision we make. These are the trade-offs we make when we choose one alternative over another. For example, if you choose choir as your elective class this year, you may have to forego the shop class that really interests you. If you work a summer job, you won’t have as much free time with your friends but you may have more money to save for post-secondary education.

 

Like anything you do, if you practice making prudent, thoughtful decisions it will get easier over time. It is truly a skill that will last a lifetime.

Decision Making Game

FAQs

What Factors Go Into the Decision-Making Process?

The Decision-Making Process can be broken down into these parts:

  1. Identify the problem
  2. Gather information
  3. List possible solutions
  4. Consider consequences of each possible solution or alternative
  5. Select the best course of action
  6. Evaluate the results

 

 

What Are the Biggest Financial Decisions I’ll Make?

Experts encourage us to concentrate our mental energy on 7 financial decisions which they say can make or break our financial future:

  1. How we handle risk – risk affects all aspects of our lives, and the way we handle risk may change as we grow older
  2. What career we choose
  3. The lifestyle we choose to lead, and how we approach consumption
  4. How we manage debt – do we pay ourselves first, or pay our creditors first?
  5. How we protect our assets, such as our ability to work
  6. How many children we have
  7. Who we marry, and whether we stay married

To read more, visit: http://moneycentral.msn.com/content/collegeandfamily/moneyinyour20s/p36955.asp

 

 

How Does Our Brain Influence Decisions?

Researchers at Baylor College of Medicine conducted a blind taste-tests of cola drinkers, and found that the majority preferred Pepsi to Coke. However, when people were shown the company logos before doing the taste-test, 3 out of 4 preferred Coke. “There’s a huge effect of the Coke label on brain activity related to the control of actions, the dredging up of memories and self-image,” said P. Reed Montague, director of the Brown Foundation Human Neuroimaging laboratory at Baylor. Seeing the Coke logo helped trigger brain activity that led to people making a different decision than if they just relied on their taste.

http://health.usnews.com/usnews/health/articles/050228/28think_4.htm

 

 

What are Opportunity Costs and the Time Value of Money?

Opportunity cost refers to what a person gives up when a decision is made. This cost, also called a trade-off, may involve one or more of your resources (time, money, and effort). For example, you decide to go out to dinner and a movie with friends on Saturday night. This involves a few trade-offs: you can’t use that evening to babysit and earn extra money; you can’t use the money you’ll spend to buy a birthday present for your best friend; and, you won’t be home for family game night with your parents and younger sister.

 

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

 

Financial opportunity costs involve placing monetary values on the decisions you make. For example, if you buy the latest gadget with money from your savings account, this means you will no longer obtain interest on those funds.

 

Time value of money can be used to measure financial opportunity costs using interest calculations

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

 

Calculation: $1,000 x .04 (4 percent) x 1 year = $40 Over 10 years, that $40 a year (saved at 4 percent) would have a value of over $480 when taking into account compound interest

 

 

What Are the Most Common Decision-Making Strategies?

There are many different ways we make decisions. Common decision-making strategies include:

 

  1. Spontaneity: Choosing the first option that comes to mind; giving little or no consideration to the consequences of the choice
  2. Compliance: Going along with family, school, work, or peer expectations
  3. Procrastination: Postponing thought and action until options are limited
  4. Agonizing: Accumulating so much information that analyzing the options becomes overwhelming
  5. Intention: Choosing an option that will be both intellectually and emotionally satisfying
  6. Desire: Choosing the option that might achieve the best result, regardless of the risk involved
  7. Avoidance: Choosing the option that is most likely to avoid the worst possible result
  8. Security: Choosing the option that will bring some success, offend the fewest people, and pose the least risk
  9. Synthesis: Choosing the option that has a good chance to succeed and which you like the best

 

 

How do Economics Influence Decision-Making?

We don’t make decisions in a vacuum. When faced with an important decision, we receive input from past experience, our values, the opinions of family and friends, and the environment around us. You may be surprised that the economy plays a role in the decisions you make. These economic factors influence both personal and financial decisions:

 

  1. Consumer prices: Changes in the buying power of the dollar, inflation
  2. Consumer spending: Demand for goods and services
  3. Gross domestic product (GDP): total value of goods and services produced within the country
  4. Housing starts: the number of new homes being built
  5. Interest rates: The cost of borrowing money
  6. Money supply: Funds available for spending in the economy
  7. Stock market index: Indicate general trends in the value of U.S. stocks
  8. Unemployment: the number of people without employment who are willing to work

Decision Making Post-Quiz