This is a separate page of the P-Q section of the Glossary
Behavioral finance FAQ / Glossary (Psychology)
Dates of related message(s) in the Behavioral-Finance group (*):
Year/month, d: developed/ discussed, i: incidental
01/3i,4i + see finance, personality, style, (investor) profile, risk, bias
Happy or unhappy feelings towards money.
Psychology studies how the mind
works and what is its role in behaviors.
Quite nosy, inquisitive and ...fascinating!
Useful also: better know what makes you decide and behave!
The main purposes and fields of human psychological studies
Are we all cuckoos?
Let us face it, those studies tend to privilege a medical approach and rest often on the idea that some flaws need to be
cured (psychotherapy) in those mental and behavioral processes. Of course, there are other goals, such as to take into account possible human reactions in various areas of activities, those related to economics among others (investing, marketing, workplace...).
If we take human psychology (we are not here to study the psychology of eggplants), they are several black boxes and engines that make people decide and behave:
Cognition (see that word), driven by memory and reasoning, is obviously an important player,
Feelings (pain and pleasure) and emotions (see that word). Hope and fear, love and hate, among others. They play an even more crucial role.
Automaticity (reflexes, habits, "instincts") also play a part. Yes, we are often on autopilot, if not we would not even breathe!
Neurons as bookkeepers
According to the aspects mentioned above, money-related pains, pleasures, loves and hates are among the phenomena studied by psychology.
Of course, not only emotions, but also cognition is affected by money.
This articles focuses on the psychology of money and finance, and on its derivate topics such as the psychology of markets and the psychology of investment.
Those disciplines try to describe generally:
What people feel and think about money,
appetites / reluctances / preferences) towards money...
...and towards activities that involve money: working / spending / saving / investing / borrowing...
decisions (choices) and behaviors,
players (see style),
social factors (peer pressure, herding...) might influence them, here we enter social psychology (see that word).
The invention of money, a long, long time ago, bringing widespread
relations that go beyond clannish autarchy, added complexity to people thinking.
It enriched the mind with many notions. Money related ideas and attitudes have found their way in philosophies, ideologies, political programs, literature.
Even if this is sometimes denied, the effects of money on civilization have been more fruitful than harmful.
Its invention have been one of the greatest practical and intellectual feats of all times, and in parallel an endless source of intellectual controversies.
Let us not forget that the invention of writing, the event that started what is called History, was made seven thousand years ago by Mesopotamian traders to keep their accounts.
How the mind drives the wallet
A field like money seems at first sight to be the realm of rationality, driven by pure economic interests. But strange behaviors are common, some are rather light and innocuous, others are rather extreme, or even verging on madness.
For example, on the light side, many people are reluctant to make purchases with cash, feeling deprived when it leaves their pocket, but they hesitate much less to buy when it is charged to a credit card.
Actually, the human factor, which is far from being exclusively rational (see that word), is crucial in money matters.
To start with individual attitudes (*), here are some key human phenomena related to money:
of each person: striving at getting more money, or pursuing other quests,
, a crucial factor in monetary decision making,
related to money and its related activities: pleasure, pain, mimicry, pride or shame, greed or fear, empathy or egotism...
This is an individual tendency but also a matter of culture (and of economic system),
(*) Having in mind that:
Often, they don't even stick to their hierarchy of preferences (see that word)
Well, don't be discouraged, there are things that you can predict about what people will do (for example in markets), but with a large margin of error.
Economics is related to social behaviors, via social institutions (markets, businesses, administrations...). Economists (at least behavioral economists) dig therefore into collective psychology (see social psychology, wealth effect, money illusion...).
To illustrate the "bias" word.
At the difference of other life situations (for example, interpersonal relations are naturally emotional), finance in general, and investing in particular, are supposed to be based on hard facts and numbers and on cold rational reckoning.
But this is far from being always the case:
There is nothing like money to induce cognitive and emotional biases
in individuals behaviors as well as in social behaviors.
Also, there are many differences between individuals (except when they get over-influenced by the group).
Some psychologists, using social science psychographic, have been working at attempts to
classify money personalities / investment styles (see "profiling 2", "style" and eprofile). Obviously the risk attitude (see risk) is one of the key criteria to categorize those styles.
Moreover, to know those biases is not enough for investors to avoid them.
They need also some self discipline (see self control, and also objectives and precautions. A thing we might need in real life also. Maybe money managers show us the way to ascetics ;-)).
Money slices.
As seen above, money psychology has specific aspects linked to the activity involved, for example market psychology, investment psychology, consumer psychology...
But more generally we can isolate two main fields of research, notions and methods, two "umbrella brands" used by academics and professionals:
economics. It deals with the psychology of consumers, producers, workers, public and private managers,
finance. It deals with behaviors linked to investors (and borrowers) and financial market.
Actually, BE and BF are rather similar fields, with rather similar research methods and which share common paradigms. All what this glossary is about, by the way.
The common quest of those psychological researches is to detect:
1) What makes all those economic / financial players feel, think, make decisions and take action
(this last thing, action taking, is the behavioral part).
Here we have "Psychological BE / BF", or more simply "economic / financial psychology".
Neuroeconomics and neurofinance (see those words) are more and more implied in those researches.
2) What are the effects on economic and financial evolutions. Here we have "Quantitative BE / BF".
Those various studies have a main common approach (we could say a ...bias), which is to detect ...biases.
What are called behavioral biases (see that phrase) are decision motivations that do not fully fits what is considered rationality (economic and financial rationality, often seen as as a type of self-interest, in the case of BE/BF).
See social psychology
(*) To find those messages: reach that Behavioral-Finance group and, once you are there, 1) click "messages", 2) enter your query in "search archives".
Members of the Behavioral Finance Group, please vote on the glossary quality at Behavioral-Finance/polls
