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Updated 09 April 2013

What is financial psychology?

If you live beyond your means, carry excessive debt or have frequent battles over money with your spouse, your problem may not be in your bank account - it may be in your head.

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If you live beyond your means, carry excessive debt, engage in inappropriate high-risk investing or have frequent battles over money with your spouse, your problem may not be in your bank account - it may be in your head, says financial psychologist Dr Carol Kauffman.

What is financial psychology?
Financial psychology addresses the many "soft" issues associated with money. These can be focused on a wide range of issues:

  • What invisible forces influence how you invest your money?
  • What are the psychological effects of sudden gains or losses of income?
  • How can you identify "blocks" that keep you from making constructive financial decisions?

Financial planning organisations are now using psychologists or social workers as consultants because so-called simple problems can spiral out of control. Like trying to diet or exercise regularly, financial fitness can look a lot easier to attain than it is.

What is behavioural finance?
It is the application of principles of psychology to the understanding and management of money. How we think and feel has a significant impact on our decisions. Nowhere is this more misunderstood than in the area of finances. When you add the effects of every financial investor in the country together, these non-rational forces impact the value of investments on a national and international level. On an individual level, these misperceptions can have a profound personal impact which spills over to every aspect of life.

What is the value of money?
Money means shockingly different things to different people.

For some, money = safety. Having it is simply a survival issue. In contrast, others feel that money = superiority. Having it is the ballast of their self-worth. Any decrease in finances means more than the money itself.

Money can equal power, or freedom or many, many things. As a result, issues that come up when money is changing hands, have a way of being baffling or spiraling out of control. The two parties involved may think they are arguing about the same thing, a particular sum of money, but in fact, they are not. – (Dr Carol Kauffman, psychologist and instructor at Harvard Medical School)

More information
To learn more about financial psychology, contact Investment Psychology Solutions or email: kobus@ips-online.co.za.

(Picture: couple doing budget from Shutterstock)

 
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