When we think of finances, we think of dollar bills, counting change, stock prices, and mathematical precision. What we do not think of is how our emotions, biases, and personal history contribute to all of the financial decisions we make. As Morgan Housel says in his book The Psychology of Money, “Financial success is not a hard science. It’s a soft skill and how you behave is more important than what you know.”
Studies and experiments in behavioral finance demonstrate that humans are not always rational, and therefore, their decisions can be imperfect. There are tangible financial costs of irrational and emotional financial behavior.
One of the most common biases is Herd Mentality. You have probably heard this terminology in relation to many topics of conversation. One of those topics should be finances. Oxford Dictionary says that herd mentality is the tendency for people’s behavior or beliefs to conform to those of the group to which they belong. This can be very dangerous in the investment community because every single person has a different past, present, and future. What they do and how they have succeeded may not apply to another’s individual situation.
Another issue we all carry with us, is our past. We all have a money personality that intuitively dictates how we perceive and interact with wealth. Our childhood money-centric experiences have a major influence on how we tackle money issues in adulthood. There are several different money personality types, and each can affect our relationship with money.
Combine internal biases, mental accounting, and our own hang-ups with handling finances, and it may seem we are doomed to fail! Nevertheless, there are ways to overcome financial behavior biases and utilize our money personalities for positive change.
For more information, please join me as I delve into this topic at Keuka College on January 10, 2023. Register for the presentation HERE.