Most people, if they’re honest, dealing with their finances is a source of stress and often negative emotions such as fear and anxiety.

Approach towards money is not just a personal characteristic but an expression of one’s general attitude toward life and the world we live in. That is why it is hard to separate financial psychology from any other kind of psychology.

Today, we know our minds can alter how we perceive things and the people around us. The human mind is in fact an obstacle to be overcome if we want to make rational financial decisions. Financial psychology explores not only the relationship between your emotions and financial decisions but also how to manage your emotions if you want a secure financial future.

The core idea of Financial Psychology is that most financial decisions are made at the subconscious level, based on one’s mental models and habits, and these mental models are developed through one’s experiences with money.

Financial Psychology draws on behavioural economics research to study how people perceive, react to and think about their finances. It also explains how people behave financially including saving, spending and investing as well as other elements of financial management such as risk-taking, loss aversion and self-control.

Most people, if they’re honest, dealing with their finances is a source of stress and often negative emotions such as fear and anxiety. Having an understanding of how your brain works when it comes to money will help you feel more in control and less stressed and anxious about your finances. In this piece of work we will introduce a framework for understanding the behavioural tendencies that many people have when it comes to money, why these tendencies exist; what triggers such reactions; why our brains work this way; and what we can do to deal with our financial decisions in a more positive way without breaking the bank or compromising our future financial goals. The psychological science behind how we interact with our finances ultimately reveals that much of our behaviours relating to money are irrational, but it also exists because humans are fundamentally competitive creatures that want to gain an edge over others — particularly when it comes to money, which has always been one of the primary yardsticks by which human beings measure success and societal value. Understanding financial psychology helps explain why many financial decisions are made at the gut level without much consideration given to analyzing the pros vs. cons in an objective manner. Building on this foundation will help you avoid making impulsive decisions based purely on emotion or misunderstanding your long-term financial goals and plans.

You are not the only one.

Even before you were born, someone else was already thinking about your future. And even now, as you are planning for your future, there are others thinking of how to make money using your plans.

These people who think about you financially might be aware that making money doesn’t have to take much effort if they know what makes you tick. As it turns out, this is true also in understanding the financial decisions that companies make with regard to their consumers.

Companies hire psychologists because human behaviour can affect decision-making and consumer buying habits. Knowing what drives people’s decision-making process helps marketers craft ad campaigns that would appeal to their targets’ emotions and rationales.

“Understanding human psychology can help you make better financial decisions”, Here’s why:

1. You’ll be able to make better choices at work Psychologists say that workers who are taken advantage of in the workplace (e.g.: not given enough praise or recognition for their efforts) are actually more likely to do more than what is expected of them — not less. This means they will use all available ways to give back even just a little, like staying late at the office without being asked if they could catch up on reports, or coming in before everyone else to finish tasks ahead of schedule so they would be done during normal hours and minimize distractions. This level of dedication is known as “organismic motivation”, which is to have a healthy organism or body. If you are taking care of your physical being, it means that you also have the drive to maintain your mental health as well — which includes financial wellness.
2. You’ll be more confident in investing Ever wondered why so many people flock to casinos despite the obvious risks? Casinos have perfected psychological marketing strategies that are designed to appeal to our emotions — and they know what kind of buttons to push for us humans to part ways with our money! Experts say that knowing these tricks can help investors avoid similar traps. For example, one strategy casinos use is known as “loss aversion” (e.g.: stating an expected loss percentage) where they tell patrons about potential losses before they even start playing so that they would feel more motivated to play, in the hopes of avoiding losses. This is also why casinos might show you a list of previous winners on electronic boards near the entrance, which is known as “social validation”.
3. You’ll be able to take better care of your finances. Our decisions are not always rational — especially when it comes to money. Knowing this can help us take control of our emotions rather than letting them guide financial choices without any consideration for consequences. For example, people are likely to save less if their bank accounts are projected to have higher values compared with those who see lower balances despite having the same monthly salary deposited into their respective accounts. The reason behind this is that the people who see higher balances are likely to take their salary for granted, while those who have low account balances will appreciate the money more.

This is why knowing human behaviour can help improve financial decision making — as difficult as it may seem for some people to think rationally when it comes to money. Making better decisions doesn’t have to be hard if you know where your strengths and weaknesses lie. Getting unbiased feedback from someone close to you could help too! So remember: managing finances is not about looking at numbers all the time, but understanding what makes you tick in order to get yourself into gear whenever life’s ups and downs get in the way of achieving financial wellness.

Originally published on Medium