What is financial psychology? What is the psychology of money?

Something important is missing 

It’s 2023. Collectively, through podcasts, books and courses, Canadians have access to more financial information than ever before; yet according to FP Canada, Canadians still report that money is the top stressor in their lives.

See what I mean? “Knowing better” does not mean “doing better” 

We can endlessly read and educate ourselves about money, but if we fail to bring awareness to how we think about, feel about and behave around money, we will continually find money to be the top stressor in our lives.

Enter financial psychology 

The psychology of money—also known as financial psychology—is the scientific research that studies why people do the things they do with their money, according to the book Money Mammoth. It’s a wide area of investigation that looks at how cognitive, social, cultural and emotional factors affect people’s financial decisions. Boiled down, financial psychology is concerned with examining the human side of money, and it puts aside the numbers.

For example, do you ever wonder why you just can’t seem to change a certain pesky, persistent money behaviour? Or why some people spend frivolously while others hoard money? Surely, it’s not just a lack of information. What is driving those decisions and impulses?

For the most part, the answers lie in how we individually think and feel about spending and saving. How we interact with money is often determined by the unconscious beliefs we hold about it, which have been influenced by social, emotional and cultural factors. 

If you want to make meaningful changes to your money behaviours, a good place to start is to understand your own money psychology. It’s not a quick fix, but it’s a lasting one.

“Until you make the unconscious conscious, it will direct your life and you will call it fate.”

—Carl Jung

There are many behavioural factors that can impact our financial lives, even if we are not consciously aware of them. Here are a few examples:  

  • Confirmation bias: “I know I am right and I will prove it to you!” Confirmation bias occurs when we only seek out information that confirms our existing beliefs, ignoring evidence that challenges them. This can lead to self-fulfilling prophecies and hinder our growth. To avoid confirmation bias, it’s important to actively seek out information and perspectives that challenge our beliefs and to make informed, objective decisions.
  • Loss aversion: Loss aversion is the idea that people are more motivated to avoid losing something than to gain something of the same value. This can lead to poor financial decisions, such as holding on to losing investments instead of accepting the loss. To make more rational financial decisions, it’s important to be aware of loss aversion and make decisions based on logic and reason.
  • Overconfidence bias: Overconfidence bias is the tendency to overestimate our abilities and level of control in a given situation. This can lead us to make overconfident decisions, such as investing in high-risk assets like cryptocurrency, and then blame external factors for any failures.
    For example, during the cryptocurrency boom of 2020, many people may have been overly confident in their ability to make successful trades, only to be disappointed when the market later corrected. Overconfidence bias can lead to poor financial decisions. Be aware of this tendency and try to make objective, informed decisions.

How can financial psychology help you?

Financial psychology, therapy and counselling are all about creating a space to reflect. That practice, in turn, brings about the self-awareness needed to recognize how aligned or misaligned our actions, thoughts and emotions are. This is necessary, especially in a world that rewards fast-paced actions. It allows us to remove those psychological barriers that keep us stuck in repeating behaviours and to make effective change.

Sumber: www.moneysense.ca

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