FINANCIAL PSYCHOLOGY

The study and  the application of psychological theories, methods, and practices to the areas of personal finance and financial services is known as financial psychology . This field takes into account 2 areas.The  First one is financial psychology includes how each of us relates to and makes decisions about the  money.  Financial psychology also  includes what psychologists refer to as “individual differences” in money-related decisions and behaviors. The  Second one is  financial psychology which includes the client-advisor relationships, that is, the application of psychology in the context of an individual’s relationship with a financial professional.

To understand the financial psychology, let us take the basic definition of psychology from the American Psychological Association (APA):

 The study of the mind and behavior is Psychology. discipline embraces all  the aspects of  human experience — from  functions of the brain to  actions of the  nations, from child development to care for an aged.  scientific research centers to mental healthcare services In every conceivable setting, “the behavior” is the enterprise of psychologists.

 services as an industry are moving speed to embrace psychology. This trick is that we have a definition of a  problem when describing  money , behavior and mind . look at the media coverage of  psychology and  finance  , mostly  people focus on cognitive errors in decision-making related to investments. Most of the media and most financial services look  at behavioral finance. However, we  focus on slowly broadening: there is much more than  financial psychology. But, this still comes with the question: what is the difference between behavioral finance and financial psychology ? take a look at each area to help differentiate the two.

Financial Psychology: The Individual or Client Perspective

For an individual perspective, financial psychology is practices related to managing one’s financial life and draws heavily from cognitive, developmental,consumer, and social psychology. In  another way, financial psychology  refers to an individual’s behavior and  mind when making spending, saving, and investing decisions . The client side focuses on how we make decisions about investing , spending, and saving .

Let us take  an example,  the way you made your last significant financial decision, so the purchase of a car or home. From an economic perspective, there is a “rightway” in terms of the most advantageous financial response to our decision . The economic “right way” is not always chosen. It is because we are influenced into our decisions by others , we have expectations  for what we want our  lives to look like today, and we have bases in our decision-making . These psychological variables may lead us away from the most financially advantageous answer when considering how we spend our money . 

 

Financial Psychology In The Client-Advisor Relationship

 A client-advisor standpoint, it includes aspects of the academic fields of therapy , financial planning, coaching, and counseling.  CFP Board defines that client psychology on the    perceptions  , behaviors, and  biases that impact client decision-making and well-being . We saw client psychology through the lens of a client-advisor relationship.  A financial planner client psychology permeates each interaction with a client. Another  examples of an understanding of financial psychology can improve the client-advisor relationship include:

• A client who may be unwilling to take advice (their  personality),

• helping them to overcome biases in decision-making that lead to negative investing outcomes (cognitive psychology), and

• the needs of a client in the later stages of life.

These challenges require how the advisor and the client think, feel, and behave in the context of the financial planning relationship. 

What Makes Us Unique? Measuring Personality

It applies psychological theories, practices and  methods to the areas of personal finance and financial services. A component of applying financial psychology measuring client personality, beliefs, attitudes, and values  . Fields of   individual differences   and personality and psychometrics cover how to measure what makes us unique when it comes to characteristics such as investing composure or general personality.

Assessments, structured interviews and  observations and tests, can uncover specific characteristics and  patterns of behaviors when it comes to  saving,  spending , and investing . By measuring characteristics that are relatively stable over time , we can also  anticipate how we might take action in the future.  From  this information , individuals and advisors both  can enhance their  future financial decision-making based on a scientific understanding of financial psychology.

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