Journal of Advances in Developmental Research

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Beyond the Rational Investor: an In-depth Exploration of Behavioural Life-cycle Theory, Mental Accounting, and Household Saving-investment Dynamics

Author(s) Ayushi Gupta, Prof. Naresh Kumar
Country India
Abstract Standard neoclassical macroeconomic and microeconomic models rest heavily upon the assumption of individual rationality, postulating that economic agents possess full information, exhibit time-consistent preferences, and allocate lifetime financial resources seamlessly to maximize utility. The Classical Life-Cycle Hypothesis (LCH) formalizes this view by conceptualizing consumption and saving decisions as dynamic optimization problems where wealth is accumulated during productive earning years and dissaved during post-retirement life. However, extensive empirical evidence reveals systematic departures from these rational benchmark models. Real-world financial behavior is boundedly rational, characterized by self-control failures, present bias, asymmetric mental budgeting, and susceptibility to choice architecture. The Behavioural Life-Cycle Theory (BLCT), pioneered by Hersh Shefrin and Richard Thaler, addresses these theoretical gaps by integrating psychological mechanics—specifically self-control mechanisms, mental accounting frameworks, and cognitive framing effects—into standard intertemporal choice theory. This comprehensive research paper provides an extensive theoretical evaluation of BLCT, analyzing how psychological frictions disrupt perfect wealth fungibility, alter saving propensities, and shape asset allocation choices across household demographics. Furthermore, this study develops an expanded multi-stage conceptual model linking demographic lifecycles, psychological traits, institutional nudge mechanisms, and long-term socio-economic security outcomes. Through a detailed synthesis of theoretical frameworks, empirical literature, and contemporary portfolio dynamics, this paper highlights critical practical and policy implications for designing financial products, behavioral nudges, and public pension schemes.
Keywords Behavioural Life-Cycle Theory, Mental Accounting, Self-Control Mechanisms, Present Bias, Choice Architecture, Asset Allocation, Saving Discipline, Household Finance, Behavioural Economics.
Published In Volume 15, Issue 2, July-December 2024
Published On 2024-07-06
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Crossref DOI prefix of IJAIDR is 10.71097/IJAIDR

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