Financial Psychology: The Art Of Investing

If you want to be better at making financial decisions, then you can take advantage of the resources that financial psychology has to offer. This area offers strategies that will help you make the best choices in money matters.

Taking the time to familiarize yourself with how to manage money is a good idea, regardless of your own financial situation. According to psychologists, after all, most people make a lot of mistakes when it comes to money. That way, financial psychology can go on to become your best friend.

In this article, we will talk about the relationship between psychology and finance, what financial psychology really is about, and the benefits of being able to manage your money. Do not become your own worst financial enemy! Instead, you should read these tips and incorporate them into your life.

Financial psychology in a nutshell

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

But what is the relationship between the two? They both take a closer look at humans and believe that people behave in such a way that it improves their well-being. They also both take a closer look at human needs and how to relate to them in order to have a better life.

Psychology versus economics

In doing so, they both try to analyze behavior and how it affects decisions. The difference is that they do this from different angles. Economics, for example, seeks to describe collective behavior, while psychology focuses on the individual.

Furthermore, their tools for research are quite different. Economists rely more heavily on the deductive hypothetical method. Margarita Curras from the Independent University of Madrid wrote about this in her article “Psychology and Economics from a Multidisciplinary Perspective.”

Psychology, on the other hand, leans on health science and looks deeper into the cultural influence, consumption and people’s relationship to material things.

The two areas have common ground, after all. Here is an incomplete list of some of their common interests.

• Consumer behavior.

• Advertising and marketing.
• Individual differences.
• Economic socialization.
• Politics.
• Ability to collaborate
• Financial markets
• Decision making.
• Identity.
• The meaning of money.

What is financial psychology?

Financial psychology is an area where one studies money-related behavior. More specifically, it analyzes the interaction between the financial markets and human nature.

Analyzing people’s behaviors reveals the psychological barriers that influence their financial decisions. Thus, it can provide insight into people’s actions that can help everyone become more aware of finances.

It also identifies the unconscious aspects of money-related decision making. By having this attention you can become more assertive. Financial psychology is not just a study in the individual. It also involves the influence of the environment and your upbringing.

Stop being your own worst enemy

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

Here are some of the steps you can take to stop being your own worst enemy:

• Keep track of your emotions. If you can, you can avoid the chaos that can lead to you losing money.
• Do not be too confident. If you are not careful enough when investing, you will end up with less dividends than you expected.
• Focus on the positive. Do not let losses make you sad. It is better to let go of it and focus on something more promising. Try not to make decisions that you know could be a disaster for your investment.

• Avoid doing the same thing over and over again in anticipation of a different outcome. The best solution is to take a sensible look at the situation, make an assessment and then act on it.
• Face the realities. Everyone is going to invest wrong at some point. Let them be, but be assertive. For example, if you have made a decision, do not mix emotions into it.

Your personality plays a role

On the other hand, keep in mind that you are not perfect, nor should you be. It is important to know yourself. Be sincere and use strategies that will improve your well-being.

It is also important to know that there are unconscious mechanisms at play with money. Your personal traits also play a role, which is why there are some who have such a hard time having to make a good financial decision.

Do not be afraid to ask for help. You can seek help from financial advisors or an expert in financial psychology so you can get tips to become more assertive.

The benefits of financial psychology

There are benefits to applying the principles of financial psychology or seeking the advice of a professional financial psychologist. By doing this you can make sure that you:

• Get a higher return on your investment.
• Understand why you are making decisions that are bad for your finances.
• Overcomes financial obstacles.
• Sharpen your attention to your finances.
• Understand the behavioral issues that cause you to make bad decisions.

• Explores your financial behavior.
• Understand your relationship to money.
• Clarifies the psychological barriers that affect your money-related decisions.
• Learn from your financial mistakes.
• Becomes more resilient
• Get rid of tension.
• Clarifies the most common misinvestments.

In conclusion, you can invite financial psychology into your life, because it will teach you a whole lot about the wonderful art of being able to invest. It is not easy. It is a learning process where you take one step at a time. Every decision you make tells you something about yourself.

Financial psychology helps you get a more assertive approach to money. It is thus a wonderful way to understand your relationship with money and know which path you will get the most out of choosing.