Behavioral finance in banking: Towards modeling credit decision-making mechanisms

Abstract

This research addresses the topic of behavioral engineering in banking as a contemporary approach to improving credit decision-making mechanisms in the Iraqi environment. It achieves this by integrating behavioral insights with traditional financial models. The research is based on the premise that credit decisions, whether at the lender or borrower level, are not based solely on financial analysis but are influenced by behavioral and cognitive patterns such as stabilization behavior, excessive optimism, herd behavior, and familiarity behavior. This can lead to deviations from rational decisions. A questionnaire was developed and distributed to 120 employees at Al-Rafidain Bank. Ninety-two of the questionnaires were found to be valid for statistical analysis, while 28 were excluded as they were unsuitable and unusable. The statistical analysis was conducted using the SPSS program, employing the arithmetic mean, standard deviation, frequencies, ratios, correlation coefficient, impact factor, and linear regression. The research concluded that there is a strong positive correlation and impact between behavioral engineering and the personality of credit decision-makers. This plays a vital role in the accuracy of lending and enhances the integration of insights. Behavioral responses of credit managers to environmental and regulatory conditions increase the ability of institutions to adapt. The study recommends that regulatory authorities should integrate behavioral principles into supervisory frameworks to achieve a balance between financial inclusion and prudent risk management. Training programs should also be designed to develop behavioral awareness and emotional intelligence among credit officers to improve the reliability of decisions.