Sunday, April 21, 2024

The Intersection Of Personal Finance And Psychology


Ever wondered what goes inside the heads of logic-driven decision-makers, who also seem to attract considerable financial gains? It’s their strategic thinking, calculated risk-taking, and analytical abilities. While these qualities are not innate, some people assume that a few are naturally born with this power of effective decision-making and wealth management. It’s time to take that veil off.

Our experiences are the key determinant of our financial behaviours. This concept has been well identified and has a name of its own, called behavioural finance.

Behavioural finance is the intersection of psychology and personal finance. It explains a few concepts that explain why people make the financial decisions they make.

  • Accounting: Individuals allocate different amounts for different purposes, yet sometimes they may be influenced by emotional bias and allocate more to the thing that doesn’t bring them optimum value. Platforms like Dezerv are trying to solve this problem by offering a range of financial services that can help people make more informed financial decisions.
  • Herd Behaviour: It has been well documented through heights and crashes in the stock market that people tend to be more attracted to what’s trending. Such behavioural responses might not always be rational and may lead to substantial losses.
  • Emotional Gap: Extreme emotions like anger, anxiety, or excitement can lead to a person making impulsive financial decisions. They may make choices that are irrational.

Behavioural finance has identified the kinds of bias that influence an investor’s decisions. These are conformational, loss aversion, experiential, and familiarity bias. These biases may lead to suboptimal outcomes for the investors.

How to break free of such biases?

While there is no one answer to this question, a good step forward would be to turn to platforms such as Fintoo and 1 Finance. A person can change their financial appetite by promoting self-awareness and intentional actions. If you’re an investor, it is best to reassess your investment decisions and identify any source of bias that may have impacted your decision-making ability. This will help you make rational choices and reward you with high returns.

The Bottom Line:

Our financial decisions are, to an extent, driven by our emotions and experiences. While some experiences may lead to a person making informed financial choices, a few may not. But, to ensure that societal trends do not influence our decisions, there’s something a person can do to acquire the mindset of a great financial decision-maker.

That is, understanding your financial personality. Knowing your financial personality is undoubtedly the first step towards attaining financial well-being. Your financial personality is determined by your core traits, which are influenced by your experiences. The platform, 1 Finance, has developed a patented scientific assessment tool called ‘MoneySignTM‘ to assess a person’s financial personality. It is an assessment of five attributes. Based on that data, a personal finance advisor is able to offer hyper-personalised financial advice to an individual. By understanding your financial personality, you can gain insights into your strengths, weaknesses, and tendencies when managing money.