The Psychology of Money

Introduction to Money

The value of a dollar is social, as it is created by society.
- Ralph Waldo Emerson

We can tell our values by looking at our checkbook stubs.
- Gloria Steinem

The safe way to double your money is to fold it over once and put it in your pocket.
- Frank Hubbard

We humans are preoccupied with money. Making money, losing money, saving money for retirement or a boat, car, house, vacation - the psychology of money drives our lives. From the day we start getting an allowance from our parents, we are affected by the psychology of money.

The psychology of money is the study of what money is and how it functions in our lives. The psychology of wealth means understanding what impact wealth has on us and includes developing healthy attitudes, beliefs, and emotions about our abundance.

At a conscious level, we think we are doing everything possible to achieve our goals. However, there still might be some sub-conscious part of us that doesn't believe we can obtain success. The more we avoid that sub-conscious part, the more obstacles will continue to show up in our every day life. That's the way, psychologists think, the mind works.

Money is a constant need, like food. It is necessary and vital to well being. But money, and the attitudes, beliefs, and emotions we have about it, can also be destructive and self-defeating, especially if we are unaware of them.

Many who have grown up with wealth use their money effectively and raise children who use their advantages productively and demonstrate good character. Others may have difficulty managing their wealth and all the emotions that come with it.

Money is a complicated issue that many individuals and couples struggle with. Understanding of the nature of money related issues creates an opportunity to more effectively address financial condition as a component of self care.

Overconfidence - Errors in judgement might occur because people in general are overconfident. Confidence as such is not a bad thing. However, overconfidence can be particularly damaging when we are dealing with our financial affairs. Overconfident investors not only make bad mistakes for themselves but also can have a powerful effect on the market as a whole.

Overreaction Bias - Some studies demonstrate people put too much emphasis on a few chance events, thinking they have spotted a trend. For example, the last earnings report becomes in their mind a signal of future earnings. Then believing that they see what others don't, they make quick decisions from superficial reasoning.

Loss Aversion - According to some behaviorists, the pain of a loss is far greater than the enjoyment of gain. Many believe people need twice as much positive to overcome a negative. Applied to the stock market, it means that investors feel twice as bad about losing money as they feel good about picking a winner.

Mental Accounting - It refers to our habit of shifting our perspective on money as surrounding circumstances change. We need to mentally put money into different "account," and that determines how we think about using it.

If in the beginning of winter, you pick up a jacket from your closet and find money, say $20, in one of the pockets, you will think that it is free money you found. You will be tempted to spend it right away, not thinking that it may have come from the same current checking account.
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