To be more intelligent in our economic decisions we can use the resources and knowledge derived from financial psychology. This branch suggests strategies to make better decisions related to capital.
Investing time in learning to manage our finances can be a wonderful idea, because what psychology tells us is that we “naturally” make important mistakes. Thus, financial psychology can be our best ally at the moment.
In this article we will tell you about the relationship between psychology and economics, what financial psychology is about, the benefits of making assertive use of our finances and some steps to avoid becoming our enemies in the economic field. We invite you to take this tour!
“Never spend your money before you have it.”
Key psychology and economics of financial psychology
Let’s see what each discipline is dedicated to. Psychology emphasizes the cognitive, behavioral and affective aspects of the human being. The economy according to the Royal Academy of the Spanish language is ‘the science that studies the most effective methods to satisfy material human needs through the use of scarce goods’.
But what is your link? Both study the human being and emphasize their well-being-oriented behavior. Each one takes into account the needs of the man and how he relates to them to find himself better.
Thus, both seek to analyze behaviors and their effects on decisions, but they do so from different perspectives. For example, economics focuses more on explaining collective behavior; In addition, the research tools are diverse, the economy in its case makes greater use of the hypothetical-deductive method, as suggested in the article ” Psychology and economics from a multidisciplinary perspective ” written by Margarita Billón Currás, professor at the Autonomous University of Madrid .
However, psychology, depending on its approach, can be closer to the health sciences, and see beyond the influence of culture and expense management, and the relationship with the material. However, these may be some of the areas of common interest of both sciences:
- Consumer behavior.
- Advertising and marketing.
- Individual differences.
- economic socialization.
- Business behavior.
- Financial markets.
- Decision making.
- Identity .
- Meaning of money.
What is financial psychology?
Financial psychology is the discipline that studies and intervenes in behaviors related to money. Specifically, it analyzes the interaction of financial markets with human nature.
Thus, through the analysis of our behavior, it shows us the psychological barriers that affect the decisions we make regarding finances. In this way, it brings us closer to a greater understanding of our own actions, that is, it helps us to broaden our financial awareness.
Also, it intervenes by showing us the role that unconscious aspects play when making decisions associated with money and guides us to be more assertive. In addition, it not only emphasizes individual aspects, it also takes into account the influence of the environment and the practices that we have been taught related to money.
How not to be our enemies?
James Montier one of the best known investors today, author of the book Financial Psychology. How Not to Be Your Own Worst Enemy , shows us how we relate to money and what to do to overcome obstacles when making financial decisions by emphasizing our behavior.
Here are some steps to not be our financial enemies. Let’s see:
- Let’s manage our emotions. By doing so we avoid the lack of control that can lead us to lose money.
- Let’s not trust too much. When we do not take it into account when investing, we reach lower returns than we expected.
- Focus on the promising. Although we have had losses, it is better to let go and focus on something new that promises, avoiding staying in elections that we know will be disastrous for our investments.
- Avoid doing things over and over again expecting a different result. It is better that we seek advice, review the situation and do something that really implies a change.
- Let’s face. Bad financial decisions can be present at various times in our lives, we must accept them, and move on. Making resilience our best tool will help us get ahead and make new decisions, even if we are afraid.
- Let us be. Emotions and thoughts are present in every day of our lives, let them flow, but be assertive. For example, if we have to make a decision, this is not the time to explore an emotion.
On the other hand, we must bear in mind that we are not perfect nor should we be, so it is important that we know ourselves, that we are authentic and that we follow strategies that are in favor of our well-being.
In addition, it is important to know that there are unconscious mechanisms that are present in our relationship with money, and that our personality traits also have an influence. Therefore, some of us are more or less wasteful. Let’s not be afraid to ask for help, a finance expert, a psychologist or a financial psychology professional can guide us to be more assertive.
Benefits of financial psychology
Applying the principles of financial psychology or having a financial psychology professional to guide us has great advantages. Let’s see some:
- Achieve higher returns.
- Understand why we are making decisions that harm us.
- Overcome financial obstacles.
- Expand awareness about our finances.
- Understand what are our behavioral problems that lead us to make bad decisions.
- Explore our financial conduct.
- Know our relationship with money.
- Know what are the psychological barriers that affect decisions related to money.
- Learn from our economic failures.
- Be more resilient.
- Release tensions.
- Identify and avoid the most common mistakes in investments.
Opening a space for financial psychology in our lives is learning the wonderful art of knowing how to invest. It is not a simple matter, but it is an unparalleled path from which we can learn every day, because each decision will show us something about ourselves.