Pricing has two dimensions – competitors and consumers. When you price your deposits based only on the competitive landscape, you are assuming that consumers respond to rates in the same way all the time. This assumption is incorrect. In reality, consumers respond to rates based on the principles of behavioral finance.

The governing principle of behavioral finance is that consumers make intuitive decisions during stressful economic times, as a result of high money anxiety, and shift to analytical decision-making mode when economic conditions improve. The implication of this principle is that financial institutions can price deposits differently during various levels of money anxiety. Here is a case in point illustrating the power of money anxiety over consumer financial behavior..MORE.



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