Our emotions can have a larger impact on our bank account than we realize. Individuals’ irrational decision-making is not limited to the realm of economics.
This article will explore the connections between psychology and economics, define financial psychology, and, most importantly, offer advice on how to make confident financial decisions that don’t hurt the economy.
Thousands of years ago, in a setting where our ancestors were almost solely concerned with their survival, our brain, the most complex structure known to man, was programmed. Today, we use this same tool to make financial decisions—such as where to put our money and how to grow it—for which the human brain isn’t wired. Financial psychology, also known as behavioral finance, is devoted to the study of these tendencies.
The likelihood of falling into these traps when analyzing reality and making decisions increases the more emotional a given decision is, as may be the case in situations of instability and nervousness like the current one.
Financial psychology
We take insights from a renowned Licensed Clinical Professional Counselor, Business Owner, Urban Balance Founder, Speaker, Coach, Consultant, and Author, Joyce Marter. She rose to immense popularity during the last couple of decades, helping the public through a crisis in mental and financial health around the world, especially in the aftermath of the 2008 housing crisis.
This catastrophe created an opening in the market for thought leaders like Marter, who have been helping people overcome the stigma and shame associated with these challenges, and instead help them recover, heal, thrive, and prosper.
Trainings, talks, coaching, consulting, digital courses, and books are all part of his Mindset FixÔ service offering. She is a pioneer of mental health, financial health, work-life harmony, and overall success and wellness.
Marter argues that it is inevitable that as the market economy develops and matures, its structural logic will begin to influence how people act individually and collectively. The values and motivations that guide these actions on a subjective (psychological) level are thus affected.
In particular, the field of financial psychology investigates the emotional factors that influence our money and personal finance choices. The field of economics has, for a long time, pretended to be the “physics” of the social sciences. With this end in mind, people sought out models that could be solved mathematically, even if doing so required making overly simplistic assumptions about the motivations of the various actors in economic systems. Although these models contributed to the expansion of knowledge, it became clear over time that their predictions rarely matched up with human behavior. There has been some forward movement in the field of behavioral economics recently due to this.
The system’s expected patterns of behavior are gradually internalized. Therefore, the values and motivations that serve as promoters and justifiers of that activity also emerge and become ingrained.
The point is crystal clear: there needs to be adequacy between the objective requirements (the behavior needed to deploy the socioeconomic structure) and the subjective factors (such as motivation and regulation) that actually influence behavior.
This may not be total, but it also cannot be very high-level dissociation. This would lead to a level of emotional instability that no system could withstand.
A kind of “social setback” sets in for an individual or group that does not conform to the prescribed norms of the structure. A commercial producer, for instance, would quickly go bankrupt if he gave away half of his output. To a similar extent, the capitalist who, in defiance of his social role, began to grant ever-increasing wage increases would be acting in a similarly counterproductive manner. A person or group perpetuates its social status by acting in ways that are consistent with that status.
