Role of Emotions and Behavioral Psychology in Debt

Allocation of an Individual

MGT1040 - PERSONAL FINANCIAL PLANNING

Project Based Component (Embedded)

WINTER SEMESTER 2019-2020

A PROJECT REPORT

By

SAINAATH R - 17BCL1009

V THIRUMALAI - 17BCL1029

ADITYA PRAKASH - 17BCL1058

Under the Guidance of

Dr. Gopinathan N
 DECLARATION BY THE CANDIDATE

I/we the undersigned solemnly declare that the project report “Role of
Emotions and Behavioral Psychology in Debt Allocation of an Individual” is
based on our work carried out during the course Personal Financial
Planning(MGT1040) under the supervision of Dr.Gopinathan N. We assert the
statements made and conclusions drawn are an outcome of my/our research work.
I/we further certify that:

1. The contents of this project report, in full or in parts, have neither been
taken from online sources nor have been submitted to any other courses.

2. The work contained in the report is original and has been done by
me/us under the general supervision of my supervisor.

3. We have followed the guidelines provided by the university

in writing the report.

4. Whenever we have used materials (data, theoretical analysis, and

text) from other sources, we have given due credit to them in the
text of the report and giving their details in the references.

5. Published from this work in conference/Journal : Yes

Signature of Students:
SAINAATH RAVISHHANKKAR
ADITYA PRAKASH
V THIRUMALAI
 Acknowledgements

We are extremely grateful to our Faculty, Dr. Gopinathan N for the confidence
bestowed upon us. We thank him for his constant assistance throughout the project.
Our special thanks to VIT Management for their constant support and
encouragement throughout the period of study. We would like to express our
gratitude and appreciation to all those who gave us the opportunity to complete this
report. Last but not least we thank our parents and friends who have been a
constant source of inspiration during the preparation of this project work.
 Contents

Abstract

CHAPTER 1. Introduction

CHAPTER 2. Objective of study

CHAPTER 3. Findings of study

3.1 Analysis methods and software

3.2 Results & Discussion

3.3 Emotions experienced by an individual due to debt

3.4 Effect of positive action

CHAPTER 4. Conclusions

References
Abstract

Debt is any amount of money or other forms of exchange medium borrowed by a

person from another person or a party. Debt is a common phenomenon among all
middle-class families and individuals. Debt has the potential to affect a person's
mental state. The disturbance may sometimes become extreme that it may cause
negative effects on the emotions of a person. Emotions play a major role in
psychology. In this paper, we are focussed on finding the impact of debts on the
happiness of an individual. In this study, we are to find the different kinds of debts
a person is liable to pay and their impact on the happiness of the person suitable
questionnaire is used as a tool to achieve the paper’s objective. The sample space is
predicted to consist of all tax-paying people who are more likely to own debts. A
suitable analysis method such as one way ANOVA, Correlation and Frequency
distribution is then done using SPSS software to conduct a qualitative evaluation of
the person’s happiness based on the responses. And then, results and conclusions
can be drawn from the survey.
1. Introduction

Personal finance is a term that covers managing your money as well as saving and
investing. It encompasses budgeting, banking, insurance, mortgages, investments,
retirement planning, and tax and estate planning. It often refers to the entire
industry that provides financial services to individuals and households and advises
them about financial and investment opportunities.

Personal finance is about meeting personal financial goals, whether it’s having
enough for short-term financial needs, planning for retirement, or saving for your
child's college education. It all depends on your income, expenses, living
requirements, and individual goals and desires—and coming up with a plan to
fulfill those needs within your financial constraints. But to make the most of your
income and savings it's important to become financially literate, so you can
distinguish between good and bad advice and make savvy decisions.

Debt in a financial perspective is an obligation that requires the debtor to pay the
required value, agreed upon undertaking the debt, to the creator. As a form of
deferred payment debt is the oldest concept in financial planning. As a form of
debt, lending of food as currency was in practice as far back as 5000BC.

The concept of debt in itself is a highly debated one with many theories centered
around the concept. The legality of certain high interest debts is, for example, a
very controversial topic. Accumulation of excessive debt has also been blamed for
increasing economic problems. The range of discussion the concept provokes made
us choose debt as the base of our project.
2. Objective of the study

Emotions and personal finances are two very intricately linked factors. Any form
of problems in our personal finances lead to negative effects on our psychological
health. The effect and extent of which is what this project will focus on. Further
narrowing down our scope, the singular concept of debt and the effect it has on our
mental well being and emotions will be studied.

Previously and most commonly debt research is mostly focussed on the objective
parameters surrounding the concept, such as debt size, interest rate etc. But the
mental effects debt has on our emotions is very intricate and sometimes controls
the entire perspective of a person under some amount of debt.

Obviously any person under debt experiences a plethora of negative emotions.

Most commonly, depression and anxiety are prevalent conditions which one may
find in a debtor. The extent of the effects however is unknown and quite
un-measurable, as there exists no psychological scale to treat emotions objectively.
This blurs the lines a lot in this study and our objective is to bring awareness to this
issue and try and treat the problem as objectively as possible.

We studied the effect of debts on the emotions of an individual using a

questionnaire as a tool. We framed various parameters to find the influence of debt
liabilities on basic emotions of an individual. Debt was the key-variable in this
study. It is obviously the dependent variable using which we studied the variations
of other independent variables like sadness, anger, happiness, irritation, anxiety,
depression etc.
3. Findings of the Study

3.1 Analysis Methods and Software - SPSS (Statistical Package for the Social
Sciences)

To assist and facilitate the analysis a trialware called SPSS was used. SPSS, short
for Statistical Package for the Social Sciences, is a software widely used for any
type of statistical study in social sciences. On top of the normal statistical
capabilities the software also provides a tool for assisting in data management and
data documentation.

For our study the software provided us the means to construct one way ANOVA
models and to perform a correlation study and a chi square test on our sample. A
majority of the software is extremely tangible and can be pre programmed using
any 4th generation command syntax language. This helped us tremendously with
our study by simplifying our repetitive tasks and by handling the large data sets of
our sample with ease.

3.2 Results & Discussion

Do you think debt has any detrimental effect on your focus and productivity?
Cumulative
Frequency Percent Valid Percent Percent
Valid Never 12 11.1 11.1 11.1
Rarely 36 33.3 33.3 44.4
Frequently 34 31.5 31.5 75.9
Very frequently 26 24.1 24.1 100.0
Total 108 100.0 100.0

Does thinking about debts affect your sleeping pattern?

Cumulative
Frequency Percent Valid Percent Percent
Valid Never 54 50.0 50.0 50.0
Rarely 18 16.7 16.7 66.7
Frequently 8 7.4 7.4 74.1
Very frequently 28 25.9 25.9 100.0
Total 108 100.0 100.0
 How often do you find yourself in a position of withdrawal and experiencing anxiety owing to
debt?
Cumulative
Frequency Percent Valid Percent Percent
Valid Never 22 20.4 20.4 20.4
Rarely 48 44.4 44.4 64.8
Frequently 28 25.9 25.9 90.7
Very frequently 10 9.3 9.3 100.0
Total 108 100.0 100.0

How often do you feel irritable due to debt?

Cumulative
Frequency Percent Valid Percent Percent
Valid Never 16 14.8 14.8 14.8
Rarely 48 44.4 44.4 59.3
Frequently 30 27.8 27.8 87.0
Very frequently 14 13.0 13.0 100.0
Total 108 100.0 100.0

The vicious cycle of debt and psychological stress is a never ending spiral into bad
credit scores. The individual falls into debt, which invokes negative emotions and
increases psychological stress in him/her. The extent of which provokes the
individual into making further poor financial choices which pushes the individual
further and the cycle continues till things go from bad to worse.

Grant Thornton LLP, the seventh largest accounting network in the world,
submitted in a study that poor psychological factors lead to poor financial decisions
especially involving debt.

3.3 Emotions experienced by an individual due to debt

Out of all the several emotions a person goes through under debt, shame and guilt
overweigh the others by a large margin. Shame especially, is a powerful emotion
commonly associated with most types of financial troubles and a large percentage
of those experiencing it try to subvert it in order to not experience it and hence live
in denial. Shame also prevents people from taking further steps to ensure
settlement of debt and any positive developments needed to better the financial
situation of the individual is rejected. This is extremely detrimental since a large
percentage of people who struggle alone with debt further spiral themselves into
more debt. So even if a person has the ability to repay the debt, negative emotions
can make the debt more unmanageable.

Resentment is another strong emotion which goes hand in hand with financial
troubles. This emotion focuses heavily on the environment surrounding the
individual under debt and the person’s personal life. Resentment caused by debt
can strain personal relationships of the individual which further adds to the list of
woes of the person, hence decreasing his/her mental state. The strain caused by this
can leave lasting impacts on the individual.

Anger and frustration also play extremely crucial roles in the psyche of a person
under debt. The stress of being powerless and unmanageable financial constraints
can slowly turn into frustration which further turns into anger. The drawbacks of
this will further push the person in more debt which will be standing proof and a
constant reminder of the negative events which transpired. This anger further
evolves into fear of the repercussions in the event of failure to comply to the terms
of the debt.

3.4 Effect of positive action

All these negative emotions strain personal relationships, break down the psyche of
a person and are very detrimental to be left as they are. Positive action can help
tremendously when going through debt. With the right mindset and proper positive
action needed, settling debts however unsettleable becomes easier.

The same research submitted by Grant Thornton cites positive action very
beneficial to both the debt at hand and the psychological health of the individual.
Furthermore burying the financial burden of debt further rejuvenates the individual
bettering their psyche.
Relief and a sense of accomplishment are some of the emotions an individual goes
through after a debt is settled. And the positive effects these have on the person are
 tremendous and help the individual steer clear of further unwise financial decisions
which got them into debt in the first place.

Further in general positive action patterns have been proven to enforce a positive
mentality which helps in staying in control when under the stress of a debt.
Positive forward action can also help combat depression and anxiety, the two most
common psychological disorders a person experiences when under financial
stress.This cycle of positive action helps combat the above mentioned downward
spiral associated with negative emotions in the context of an overstanding debt.

4. Conclusions

Generally, we are aware that debt has a detrimental effect on the psychological
health of an individual. From this study it is clear that debt significantly affects the
emotions of a person. The results of our analysis show that debts can potentially
trigger irregularities in sleeping patterns owing to high frequency of thinking about
debts. 25.9% of our study group were found to experience anxiety and withdrawal
due to debts, which is quite alarming. Moreover, 33.1% of the respondents have
admitted that debts affect their performance and productivity at the workplace.
Apparently, they find it difficult to focus on a given piece of work given the fact
that they frequently think about debts. A majority of the respondents seem to face
fear and anxiety while thinking about repayment of their debts
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