Individual financial risk management requires financial literacy
The goal of this theme is to raise awareness among the young generation about the various influential factors in financial decision-making
In Bangladesh, the Financial Literacy Week is being observed from 17 March to 23 March this year. On this occasion, Bangladesh Bank has given specific directives to all scheduled banks, emphasising the theme "Think before you follow, wise money tomorrow."
The goal of this theme is to raise awareness among the young generation about the various influential factors in financial decision-making. Specifically, it aims to inform about how finfluencers, herd mentality, biased advice, and peer or social media pressure can impact financial decisions and how we can take right decisions considering these.
Influence of financial influencers (finfluencers)
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In today's digital age, financial influencers or finfluencers provide advice on economics, investment, and individual financial management via social media platforms. They operate across various platforms such as YouTube, Facebook, TikTok, LinkedIn, and Instagram and often gain many followers, mostly from the young generation.
Benefits of financial advice from finfluencers
• They present complex financial concepts in simple language that is easily understandable to the general public.
• They provide new information on stock markets, cryptocurrencies, or startup business.
• They create educational content on budgeting, saving, and debt management.
Risks of finfluencers in financial decision-making
• Many financial advisors provide advice without proper research or financial licensing, which can be misleading.
• Sometimes biased information may be given due to brand sponsorships or compensation.
• Some financial influencers promote high-risk investments (such as stocks, cryptocurrencies), which can lead to losses for ordinary investors.
How to stay cautious and be alert
• Verify the source before accepting and executing any financial advice.
• Do not rely solely on finfluencers' advice; seek expert opinions as well.
• Follow the advice of respective authorised bodies and financial institutions.
Impact of herd mentality in financial decision-making
Herd mentality refers to behaviour where individuals follow others in making decisions without using their own judgment, particularly in investments and financial matters.
This is often observed in stock markets, cryptocurrencies, real estate, and other investment areas.
Benefits of herd mentality in financial decision-making
• It helps people to make quick decisions by following others' actions which saves time.
• Following experienced investors increases the probability of making good investment choices.
• Easy to understand market trends through following the behavior of larger investors.
Risks of herd mentality in financial decision-making
• Many people invest without market analysis, just by following others, this can incur losses.
• When many people invest in the same asset, it can cause unusual price hike, which may collapse later.
• If most people move towards a wrong investment, it can negatively impact the overall market.
How to stay cautious and be alert
• We may conduct independent research and market analysis before investment.
• We should not make decisions solely relying on public opinion; seek advice from financial advisors.
• Avoid high-risk trends (such as unexpected popularity of particular shares or stocks or cryptocurrencies).
Impact of biased advice in financial decision-making
Biased advice refers to advice given based on the personal interests or benefits of the advisor, which may not always be the best for the decision taker. This can lead to adverse financial decisions.
Benefits of biased advice in financial decision-making
• In some situations, biased advice may help make quick decisions.
• Based on the advisor's experience, it may offer effective guidance.
Risks of biased advice in financial decision-making
• The advisor may be inclined towards their own interests, which can be harmful for the recipient.
• Advice given for the advisor's own interest can lead to poor decisions.
• A lack of necessary information may result in incorrect decisions.
How to stay cautious and be alert
• Choose impartial advisors for any financial guidance.
• Make decisions based on multiple sources of information.
• Verify the authenticity of information and relevance of advice and finally conduct your own research.
Impact of peer or social media pressure in financial decision-making
Peer or social media pressure refers to the influence that a person feels from their friends, colleagues, or social media platforms, forcing them to take certain actions or make decisions that may contradict their true desires or situation.
Benefits of peer or social media pressure in financial decision-making:
• Peer or social media pressure may inspire an individual to take on new challenges and exceed their limits.
• Peer or social Media pressure may assist in building new relationships and networks, which may be beneficial in the future.
Risks of peer or social media pressure in financial decision-making
• Excessive peer or social media pressure may encourage someone to overlook their own desires or personality.
• Social media and peer pressure may encourage unnecessary spending, such as purchasing branded products.
• Unnecessary comparisons or pressure can lead to mental stress or anxiety.
How to stay cautious and be alert
• We may prioritise our own desires and values, stepping away from social media or peer pressure.
• We may limit social media usage and focus on essential matters.
• We may spend time with positive and supportive people who help guide you on the right path.
Through the theme "Think before you follow, wise money tomorrow," Bangladesh Bank aims to raise awareness regarding finfluencers, herd mentality, biased advice, and peer or social media pressure which can significantly impact financial decisions.
To stay alert among these influences, it is necessary to depend on reliable information, research, and expert advice. For financial security and making the right decisions, always prioritise your own desires, values, and cautious approach.
Establishing financial transactions with strong financial institutions or banks with good ratings from Bangladesh Bank or other regulatory bodies can reduce risks significantly.
Md Rashadul Anwar is the head of Retail Distribution Division and chief bancassurance officer of Midland Bank PLC.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
