Financial Psychology: The Art Of Knowing How To Invest

Taking the time to learn how to handle your money is a good idea, no matter what your current financial situation is. After all, according to psychologists, people naturally make many mistakes when it comes to money. Thus, financial psychology can prove to be your new best friend.

In this article, we will talk about the relationship between psychology and economics, what financial psychology really is, and the benefits of taking control of your money. Do not become your own worst financial enemy! Instead, read these tips and put them into practice in your life.

Financial psychology in a nutshell

Psychology focuses on the cognitive, behavioral, and emotional aspects of being human. Economics, on the other hand, is a “social science that is primarily concerned with describing and analyzing the production, consumption, and transfer of wealth” (Merriam-Webster).

But what is the relationship between these two? Both of them study people and believe that people behave in a way that improves their well-being. In addition, both of them take human needs and how to relate to them to live better into consideration.

Psychology versus economics

As we found out,  both sciences try to analyze behavior and how it affects our decision making. The difference is that they do it from different perspectives. For example, economics aims to describe collective behavior, while psychology focuses on the individual. Furthermore, the research tools are quite different. Economics is more dependent on the deductive hypothetical method. Margarita Billon Curras from the Universidad Autónoma de Madrid wrote about this in her article “Psychology and Economics from a Multidisciplinary Perspective”.

Psychology, on the other hand, leans more towards health-related science and looks beyond cultural influence, consumption and people’s relationship to material things.

However, the two fields have something in common. Here is a non-exhaustive list of some of their common interests:

• Consumer behavior.
• Publicity and marketing.
• Individual differences.
• Economic socialization.
• Policy.
• Business behavior.
• Financial markets.
• Decision making.
• Identity.
• The importance of money.

What is financial psychology?

Financial psychology is the discipline that studies money-related behavior. More specifically, it analyzes the interplay between financial markets and human nature.

By analyzing people’s behavior, it reveals the psychological blockages that affect their financial decisions. As a consequence, it offers insight into people’s actions, which can help them be more financially conscious.

It also identifies the unconscious aspects of money-related decision-making. Being aware can help you be more determined. However, financial psychology does not only study the individual. It also takes into account the environmental impact and how you were raised.

Stop being your own worst enemy

James Montier is one of the most well-known investors today. The book he ‘s The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy’s talks about how people relate to money and how you can change your behavior to overcome obstacles.

Here are some steps you can take to stop being your worst financial enemy:

• Control your emotions. If you do, you can avoid the chaos that can cause you to lose money.
• Do not be overly confident. If you are not careful enough when investing, you will end up with less return than you might expect.

• Focus on the positive. Don’t let loss make you disappointed. It is better to let go of them and instead focus on something promising. Try not to make decisions that you know will be disastrous for your investments.
• Avoid doing the same thing over and over again and expect different results. It is better to look closely at the situation, assess it, and then take action.
• Go face to face with reality. Everyone makes bad financial choices at some point. Let go of them, but be determined. For example, if you have to make a decision, do not let your emotions get in the way.

Your personality plays a role

On the other hand, remember that you are not perfect, nor should you be. It is important that you know yourself, are genuine, and use strategies that will improve your well-being.

It is also important to know that there are unconscious mechanisms that work with your relationship to money. Your personality traits play a role, which is why it is so difficult for many to make good financial decisions. Do not be afraid to ask for help. You can consult a financial advisor or an expert in financial psychology for tips to be more specific.

The benefits of financial psychology

You get several benefits by taking advantage of the principles of financial psychology or by getting advice from a professional in financial psychology. This will ensure that you:

• Get a higher return on your investment.
• Understand why you are making bad choices when it comes to your finances.
• Overcomes economic obstacles.
• Raise awareness about your finances.
• Understand the behavioral problems that cause you to make bad decisions.
• Explores your financial behavior.
• Understand your relationship to money.
• Identifies the psychological barriers that affect your money-related decisions.
• Learn from your financial mistakes.

• Becomes more resilient.
• Releases tension.
• Identify the most common investment errors.

To conclude, inviting financial psychology into your life will teach you about the wonderful art of knowing how to invest. Although not easy, it is a lesson that you can learn step by step. Every decision you make tells you something about yourself.

Financial psychology helps you to be more determined when it comes to money. Thus, it is a great way to understand your relationship with money, as well as to know which path will be most beneficial for you.