Mental Accounting and Financial Decisions of Arab Students Abroad

Introduction

The main purpose of this research study is to understand the psychology of decision-making and household management among Arab students living abroad. The study takes into consideration the impact of cultural differences and the influence of such culture on dealing with bank interest. The research model used is the addition of a moderating variable. Data will be collected through questionnaires that will be designed, piloted, and distributed to the target population. These questionnaires are designed to gather accurate information on psychology, financial decision-making, and household management. It is expected that the construction of accounts after considering ambiguous expenses, the classification of expenses into different categories, and the psychology of belief in Islamic law each have a positive relationship with the level of spending and financial decision-making. It is also expected that the lack of extensive Islamic banking abroad has a positive correlation with spending and financial decision-making.

Financial education and understanding have become increasingly significant issues, largely because of the growing complexity of financial products and the rising accountability individuals bear for their own financial well-being. Knowledgeable, financially educated consumers are more capable of making sound decisions for their households and are therefore better positioned to enhance their economic and financial security (Hilgert and Hogarth, 2003). Moreover, in accordance with behavioral economics, psychology plays a significant role in the financial and economic decisions made within the household. For instance, consumers with a large sum of money will often spend less than consumers with smaller amounts. The same pattern applies to individuals who spend more freely from a current account than from a savings account. Mental budgets are linked to an endpoint — either the spending or saving of money. In this restricted perspective, mental accounting is referred to as mental budgeting and is understood to challenge the economic assumption of the fungibility of money (Antonides et al., 2011).

This research paper focuses on Arab students who study abroad. There is a distinctive difference between Arabian and overseas cultures, and this difference influences how these students deal with bank interest. Islamic law precludes Muslims from paying or receiving any interest accrued on debt. The belief embedded in Islamic law is that Muslims should sustain economic harmony in all kinds of financial transactions. It is therefore not acceptable for a wealthy individual to benefit from loaning money to a less privileged one. This belief can have a significant impact on how Muslims finance their education, cars, and housing, and on the way they pay bills and use credit cards (Abdirizak, 2016).

Literature Review

Thaler (1999) describes mental accounting as the set of cognitive operations used by individuals and households to organize, evaluate, and track financial activities. The author assumes that individuals perceive outcomes through a value function, where the incremental change from a reference point determines subsequent choices. Thaler (1999) asserts that the role of the value function in mental accounting is to delineate how events are perceived and interpreted when making decisions. The author further emphasizes that every element of mental bookkeeping challenges the economic standard of fungibility, meaning that individuals discriminate among money based on which mental account it is stored in. As a result, mental accounting influences choice.

Cheema and Soman (2006) define mental accounting as a cognitive form of accounting — a set of rules for tracking expenses — that aids individuals in controlling their level of consumption. The authors examine malleable mental accounting, which encompasses flexibility in categorizing ambiguous expenses and in forming mental accounts to accommodate uncategorized expenses. This flexibility permits consumers to justify attractive spending opportunities. In their first experiment, participants were asked to rate the likelihood of incurring either an unambiguous expense or a more ambiguous one, and to assess how well the expense fit into a given category. Results indicated that when an expense was ambiguous, individuals assigned it to whichever account had surplus funds, making full use of the flexibility available to justify the expense. The overall finding was that individuals are more likely to spend when they form accounts after considering the ambiguous expense. The inference is that where there is ambiguity in an individual's mental account, there is an opportunity for creative accounting.

According to Heath and Soll (1996), consumers set budgets for categories of expenses and track their actual spending against those budgets. Because budgets cannot precisely anticipate all consumption opportunities, individuals may allocate too much or too little to a given category, causing them to under-consume or over-consume products in that category. The authors indicate that consumers often set budgets that lead to under-consumption. Furthermore, budgeting effects are stronger for purchases that are highly representative of their category, as such purchases reduce the amount consumers spend in that category and inhibit the ability to purchase other typical products.

Brendl et al. (1998) argue that mental accounting is a manifestation of a significant self-regulatory process. The authors assert that separate mental accounts are organized around active goals, which can be specific or abstract, and around continuous objectives. Thaler (1999) similarly illustrates the self-control structures of mental accounts, noting that distributing spending into budget categories enables reasonable trade-offs. He labels money into accounts at three levels: first, expenditures are clustered into budgets for food and housing; second, wealth is allocated into accounts for savings, pension, and emergency funds; and third, income is divided into groupings such as regular income and bonuses.

Research Hypotheses

The study addresses four research questions aimed at generating an understanding of the influence of psychology on financial decision-making and household management:

Q1. How does the construction of accounts affect spending and financial decision-making for the students?

Q2. How does the belief in and adherence to Islamic law affect spending and financial decision-making for the students?

Q3. How does the lack of extensive Islamic banking abroad affect spending and financial decision-making for the students?

Q4. How does the classification of expenses into various categories affect spending and financial decision-making for the students?

From these questions, the following hypotheses have been formulated:

H1: Construction of accounts after considering ambiguous expenses influences the level of spending and financial decision-making.

This hypothesis encompasses the aspect of malleable accounting. Malleability in mental accounting takes into consideration the consumer's flexibility in categorizing ambiguous expenses or in creating mental accounts to accommodate uncategorized expenses. This element of flexibility enables consumers to identify ambiguities and to circumvent the self-discipline enforced by mental accounts.

H2: The psychology of belief in Islamic law influences the level of spending and financial decision-making.

This hypothesis examines whether belief in and adherence to Islamic law affects the financial decisions made and the level of spending. Muslims adhering to Islamic law are not permitted to be spendthrifts and are expected to be responsible in their financial decisions. This can limit participants' level of spending, particularly with respect to ambiguous expenses.

H3: The lack of extensive Islamic banking abroad influences the level of spending and financial decision-making.

This hypothesis examines whether the limited availability of Islamic banking institutions overseas influences spending levels and financial decisions. Muslim consumers face significant challenges in adhering to Islamic law given the scarcity of Islamic banking abroad. This can create particular difficulties for students in obtaining student loans. According to Islamic law, Muslims should neither pay nor receive interest, which means that conventional banks may be reluctant to provide such students with loans, anticipating that they will not pay the accrued interest.

H4: Classification of expenses into different categories influences the level of spending and financial decision-making.

Mental accounting differs from standard economic accounting in that money is labeled for specific spending or saving categories, and the budgets set aside for those categories are treated as binding. This influences household financial behavior in important ways. Labeling money for particular spending categories may result in either overspending or underspending: if the budget ceiling is set high, spending is likely to be high, and vice versa. Mental budgeting therefore helps individuals avoid undesirable balances within certain mental budget categories.