What Is Financial Psychology? (2024)

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

Many of the choices people make regarding their finances are the result of unexamined attitudes and beliefs they hold about money, its role in their lives, and how to best employ it in pursuit of one’s life goals.

What Is Financial Psychology?

Financial psychology is the study of why we do what we do with our money. It is a broad field that encompasses the cognitive, social, emotional, and cultural factors that come into play when people make financial decisions. Put simply: Financial psychology is about the human (as opposed to the numeric) side of financial trade-offs.

For example, when someone inherits wealth after a loved one dies, they can sometimes have a hard time spending or enjoying that money because it feels like a betrayal of their loved one to benefit in any way from the death. That has nothing to do with the money itself and everything to do with the process of grieving, but it affects financial behavior.

What makes one person a big spender and another a diligent saver? It’s likely not their age, income, education, or gender but the way they each think and feel about spending and saving. It is our thinking that drives our behavior. If you want to make a lasting change to your financial behavior, start by knowing your own mind.

How Does Psychology Affect Financial Choices?

Some financial decisions can be explained by cognitive psychology, which is focused on how the brain organizes, processes, and retrieves information. Take, for example, loss aversion: The human brain feels the pain of a loss as greater than the pleasure of an equal gain. That’s cognitive. We can’t change loss aversion; it’s just how our brains work. When it comes to cognitive psychology, much of the time the best thing we can do is to get educated about the ways we might unconsciously misjudge trade-offs and then consciously compensate for that misjudgment.

Other financial decisions are influenced by social psychology, which focuses on how we relate to ourselves and others. For example, someone may associate wealth with greed or exploitation because they grew up around people who vilified the rich. Another person may believe that financial success will win them friends, and thus enjoy buying rounds of drinks for others when they socialize. These beliefs are the result of social psychology. In these examples, an attitude or belief that may start out as unconscious could be made conscious or changed if the person wants to do the work to change it.

The beliefs and attitudes we hold regarding money have a profound, but often unexamined, effect on our financial behaviors. Some people associate money with opportunity and freedom, and so they use it to open doors, fund adventures, and make memories. Others associate money with security and safety and hold on to as much as possible to preserve their peace of mind. If these two are spouses, there is great potential for conflict over financial priorities. Arguing over which behavior is “right” will likely be unfruitful, but understanding the deep psychological need that each behavior serves can lead to shared understanding and creative problem solving.

How Can Financial Psychology Help Me?

You don’t need to be a financial mess or have major financial hang-ups to benefit from financial psychology. Understanding your own financial attitudes and beliefs can help you make better decisions, improve understanding and communication with loved ones, and ultimately help you bring your finances into better alignment with your priorities and goals.

A healthier financial mindset can also improve quality of life even if your finances don’t change at all. There are some attitudes and beliefs that are strongly associated with financial well-being and others that are linked to financial stress and discontent. Learning the basics of a healthy financial mindset is a simple way to improve your financial quality of life and decision-making.

Getting Started

If you want to make changes to how you handle your money, a good place to start is to take stock of the attitudes and beliefs that you currently hold about money and ask, “Is this healthy? Is this serving me well? Is this even true?” If the answers are no, then you can start to challenge and reshape those beliefs.

Here are a few questions to get you started. There are no right or wrong answers. The purpose of these questions is to illuminate how you currently think and feel about money.

  1. Finish the sentence with one word: “Money is__________________.” Why do you believe this is true? What experiences or observations have taught you this?
  2. If money were a character in the story of your life, would it be a hero or a villain? A friend or a foe? Why?
  3. Growing up, what was your financial situation? How did the people raising you handle their money? Do you see any ways that this affects the way you think about or handle money today?
  4. How does money affect your social life, for good or ill?
  5. If money were not a consideration, how would you be living your life? Would it be very different from how you currently live? How do you feel about that? Do you see those emotions coming up in your financial behavior?

In Conclusion

When you make the unconscious conscious, you are no longer led by habit and reflex. Applying a conscious lens to the attitudes and beliefs that drive our behavior allows us the opportunity to make changes where they can have the greatest impact: in our thoughts.

When thinking changes, behavior naturally follows suit. Stay tuned for more on how to challenge and change problematic financial attitudes and beliefs.

The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.

As an expert in financial psychology, I can attest to the profound impact that our attitudes and beliefs about money can have on our financial decisions and behaviors. The quote by Carl Jung at the beginning of the article highlights a fundamental truth – until we make the unconscious conscious, our lives are directed by forces we may not fully understand, and this often manifests as what we perceive as fate.

Financial psychology, as described in the article, is a comprehensive study that delves into the cognitive, social, emotional, and cultural factors influencing how individuals handle their finances. It goes beyond the numerical aspects of money and explores the human side of financial trade-offs. This field recognizes that financial decisions are not solely rational calculations but are deeply intertwined with our thoughts, emotions, and social contexts.

The article touches upon several key concepts within financial psychology:

  1. Unexamined Attitudes and Beliefs: The article emphasizes that many financial choices stem from unexamined attitudes and beliefs about money, its role in our lives, and how it aligns with our life goals. Understanding these underlying beliefs is crucial for making informed financial decisions.

  2. Impact of Grief on Financial Behavior: An illustrative example in the article involves individuals inheriting wealth after the death of a loved one. The struggle to spend or enjoy the money is not rational but is deeply connected to the grieving process. This showcases how emotions and psychological processes influence financial behavior.

  3. Role of Thinking in Financial Behavior: The article suggests that it's not demographics like age, income, or education that determine financial behavior but rather the way individuals think and feel about spending and saving. This underscores the importance of understanding one's own mindset to bring about lasting changes in financial behavior.

  4. Cognitive Psychology and Loss Aversion: Loss aversion is explained through cognitive psychology – the idea that the human brain perceives the pain of loss as greater than the pleasure of an equivalent gain. Acknowledging and compensating for such cognitive biases is crucial in making sound financial decisions.

  5. Influence of Social Psychology: Social psychology is cited as a factor influencing financial decisions, where attitudes towards wealth and success are shaped by social interactions and upbringing. This aspect highlights the interpersonal dynamics that contribute to financial behaviors.

  6. Impact of Financial Beliefs on Relationships: The article discusses how conflicting beliefs about money can lead to potential conflicts in relationships, emphasizing the need for understanding the deep psychological needs that drive financial behaviors.

  7. Benefits of Financial Psychology: Financial psychology is presented as a tool for individuals to gain insights into their financial attitudes and beliefs, leading to better decision-making, improved communication with others, and alignment of finances with personal priorities and goals.

  8. Healthy Financial Mindset: The article suggests that a healthy financial mindset can enhance one's quality of life, irrespective of changes in financial circ*mstances. It introduces the idea that certain attitudes are associated with financial well-being, while others contribute to stress and discontent.

To make changes in how individuals handle their money, the article recommends starting by examining and challenging existing attitudes and beliefs. The provided questions prompt readers to reflect on their own financial mindset, encouraging a conscious exploration of thoughts and emotions related to money.

In conclusion, the article underscores the transformative power of making the unconscious conscious in the realm of financial psychology. By understanding and reshaping our attitudes and beliefs about money, we gain the ability to consciously influence our financial behaviors. This aligns with the broader philosophy of cognitive and behavioral approaches to financial well-being.

What Is Financial Psychology? (2024)
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