How Self-Efficacy Shapes Financial Outcomes
Many financial decisions are made in an uncertain environment. For example, people evaluate whether the expected benefits of saving for a rainy day may or may not outweigh the cost of reducing consumption today.
Borrowers struggling to repay loans compare the potential benefits of avoiding default, such as preserving a good credit score, to the costs of reducing spending today or getting a second job to avoid defaulting on their debt. Many middle-aged people evaluate whether insuring their long-term care is worthwhile at the expense of the insurance premiums each month.
In all these choices, people consider a trade-off involving an action that is costly today and has an uncertain effect on how future outcomes might look. Therefore, people's subjective perception of this trade-off is likely to influence their decisions.