The Financial Actions and Outcomes Cycle is a feedback loop comprised of the individual’s mindset and available choices, followed by the decisions made and actions taken by the individual as well as the resulting outcomes and the impacts of any external shocks (i.e., unexpected events).
Mindset and Available Choice Set:
Broadly defined as a set of mental attitudes, an individual’s mindset at the time they make a financial decision or transaction influences the choice they make. Some aspects of an individual’s mindset are based on foundational factors. Their mindset might change from moment to moment (e.g., mood), be based on a particular situation (e.g., heightened stress from unexpectedly needing to move to a new city) or may persist over time (e.g., a belief in one’s ability to solve problems). A person’s level of financial knowledge and skills influences the mindset they bring to a specific choice. The degree to which they have an opportunity to exercise choice in the marketplace also influences their mindset. And, because the mindset is part of a cycle, it also depends on the results of the most recent actions taken and decisions made.
The available choice set at any given time depends on the outcomes from previous actions or unexpected shocks; the degree to which they have access to—and are included in—financial society; and/or whether they have access to financial information. For example, a job seeker with a high school diploma will have a different set of opportunities available to them than a college graduate. Or, someone with a low credit score will not have access to the same contract terms as someone in with a high credit score. Foundational factors such as the state of the economy or a person’s family or culture can also inform available choice sets and how they are perceived.
Decisions and Actions:
The presence or absence of decisions made, and actions taken, by an individual. Decisions and actions might include making a purchase, taking a job or selecting a place to live.
Resulting Outcomes:
Outcomes themselves can be objective (e.g., credit score) or subjective (e.g., confidence). Outcomes can result from decisions and actions (or indecisions and inactions) as well as from external financial shocks. Shocks can be positive (e.g., wage increase) or negative (e.g., large health care bill, victim of fraud). Outcomes themselves can be objective (e.g., credit score) or subjective (e.g., confidence).
NOTE: Whether an individual makes choices that positively impact their state of financial well-being can be influenced by other elements of the Personal Finance Ecosystem.