This video talks about how emotions and beliefs affect behaviour which influences financial goals. For example fears from traumatic or any other challenging experience such as Covid can influence behaviour even though the situation has changed. He also talks about consumer confidence being low due to information and hindsight bias. Checking the facts will help you overcome your cognitive bias to avoid missing out on opportunities. Hindsight bias is when people predict the present from the past behaviour such as financial hardship to avoid pain. People suddenly have a fear of acting on opportunities due to past challenges which has created a fear. Moreover, people may listen and believe those who tell attractive stories that validate outdated and unhelpful beliefs. This is the halo effect and confirmation bias in action. People who listen to the news to buy shares may miss out on buying undervalued shares as the news may cause them to become overvalued due to following the herd.
Take control of your finances and do the numbers as well as learn about the economy to make sure you are working with helpful thoughts rather than cognitive bias. If you hear about a rumour, do your research before acting.
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Financial psychology focuses on the emotional, cognitive and behavioural aspects of money where thoughts and feelings about money will influence how you engage with it.
Cognitive bias is often discussed in finance. Cognitive bias can often be unhelpful when it comes to making decisions about money. Cognitive bias is a mental shortcut and allows for faster automatic thinking. Noticing your cognitive bias can help manage money better. For example, loss eversion means that you experience more pain with loss than gaining. So if you are thinking about shares and focusing on losing money then you may avoid buying shares due to your fears rather than reality. It is recommended that you use money you can afford to lose when getting into shares so you can cope with the volatility. Another cognitive bias that may not be helpful is following the herd. You may hear in the media of a particular share to buy without doing any fundamental or technical analysis. People who herd receive confirmation bias when the majority confirm information the investor is thinking instead of research and analysis. Halo effect is another cognitive bias and occurs when people believe information from a source that has good standing without checking if the information is actually accurate. Psychologist Daniel Kahneman encourages to think slower to avoid making wrong financial decisions as fast thinking can be loaded with bias that won't help. Therefore, step back and consider if it is best to analyse the information before making any decisions about money. Research indicates that families who have dinner together develop emotionally stable children. Dinner can be space where parents and children talk about their day as well as share, acknowledge and self regulate feelings together. Dinner can also be a time to talk about money and economics. Money is usually taught in schools but it is helpful for parents to expand the topic and improve thoughts and feelings about money. However, it is also important for parents to check in on their own beliefs about money to avoid contaminating the discussion with negative beliefs and thoughts.
Negative beliefs and thoughts can be generational and you as a parent, if aware of your own, can break the generational habit and distil new and healthy beliefs about money to your children. Money is invisable now as finances are distributed through online transaction or cards. Giving children pocket money and encouraging them to distribute it in money jars can help them see the money, learn to budget and also possibly give away some to a charity to learn about caring for others and other people's needs beyond their own can help build financial literacy and improve their relationship with money. Bring money into family discussions and check in with yourself to ensure the conversation is healthy rather than negative. If it is negative you may need help through counselling to improve the way you see money so you can create a healthy money story with your own children. When an advisor meets a new client and gets to know them, they have systems in place to learn about their relationship with money, financial literacy and situation. Step one of the six steps of the financial advice includes building the relationship between the financial planner and client and step two involves collecting information before any advice is given. If step one and two are not established well, then the client will less likely accept the advice as the trust would not have been established.
Trust is built when there is interest in the other person's story through discovery questions. The planner will have interest in the client's family history, relationship with money, current situation, work habits, and future goals through curiosity . The focus on the client's past, present and future story needs to happen before the focus on numbers. The planner needs to remain curious rather than assume the client's story. Curiosity is the process of not knowing, remaining interested and asking open ended questions. Structured questionnaires can be used together with non structured questions. Non structured questions gives space for the client to tell the story beyond questions in the questionnaire. The planner will facilitate the process by using their skill to guide the client. Trust will increase the planners ability to gather complete and accurate information where appropriate financial advice can be provided. Trust built through curious and genuine interest in the client's story will show the advisor cares. Trust can also be developed through empathic listening, listening to non-verbal cues, active listening, eye contact, micro communication, and giving the client the space to expand on short answers through 'tell me more' questions. These communication strategies can build connection and deepen understanding in the client's story. Trust will increase the client's motivation to implement the strategies in the Statement of Advice. Have a desire to listen, remain curious and ask questions with empathy as people's view about money is personal and connected to an emotional story that won't be disclosed unless trust is built. Through curiosity, empathy and a genuine interest in the client's story, a stronger relationship between client and advisor will develop. The client will feel heard and respected. Hoarding may include challenges with spending which is called acquisitions or avoiding throwing things out. Online spending is a challenge with people hoard, who using spending to manage emotions or challenges with managing impulsive behaviour. Purchases may be planned or unplanned, however purchasing goods online can influence impulsive behaviour as there is a lack of deterrents that can help with managing impulsive behaviour and planning. People often go online to buy a planned item and then spend more than expected. Sometimes items are grouped to influence more spending. Conscious decision making require the ability to step back and reflect. Moreover, stimulus can influence behaviour for online purchasing. Stimulus may include special deals which can cause the cognitive bias of fear of missing out. Research shows the group shopping such as Groupon and unfamiliar brands influence impulse spending and can be a challenge for a consumer who struggles with impulsive spending, hoarding or emotional control. To increase online spending retailers limit physical stores, reduce mental and time effort when spending and improve the shopping experience. To reduce online spending, the consumer would need to create a strategy where more time is required when spending and the fear of missing out is reduced by realising it is an illusion. When spending online, have someone with you to talk through the process so you can think while talking, take your time and think about the purchase, don't spend online if you are emotional but work through your emotions by contacting a helpline, writing in a journal or talking to a friend. Make a habit not to let specials influence your behaviour as there is no such thing as missing out on anything. Furthermore, you may have a separate bank account that don't charge a fee for online spending and automatically deposit a portion of your income into that account to manage impulsive spending and online spending in general. Decision making also requires talking through the process, so talk to a family member or friend to discuss your strategy as that can help with reflection and improving your capacity to decide rationally. Becoming financially independent can be challenging as well as rewarding when you see the progress you are making. Staying on track can be equally challenging as you may have a budget that may seem challenging at the start, such as being encouraged to eat at restaurants more than your budget allows because your friends are doing it. You need to talk to your friends about your goals so they will understand and help you along your journey. You can't always do it alone. If you are in a relationship talk about your goals so you both are on the same page.
If you feel discouraged and disheartened as your money goals feel too complicated and you don't like your new lifestyle, remember the end goal. You may find a vison board helpful to remind you of your end goal. Consider the internal and external motivation. Going off track can feel right and good for the moment but terrible later on. Refocus and get back on track. Remember the why, what was challenging, work on the challenges and then refocus. It is normal to go off track as your new journey is a learning experience but can be a rewarding one. If you are doing something new such as investing in shares, bonds, self-managed super fund or real-estate learn something new about to topic to reignite your motivation to remain on track. Talk to people about what you are doing (only those who understand and can support you as some people are not on the same journey and may discourage you) which can help improve motivation and develop your thoughts around your goals. Staying on track and focusing on your goals is a work in progress. Sometimes we need to go off track to learn something new, so take the learning out of it. Going off track may mean you need to experience what you don't want so you can focus on what you do want. Going off track can be the motivator you need to stay on track so appreciate every step you take and keep reviewing your journey. The psychology of risk involves staying with uncertainty, managing your emotions and not making decisions based on how you feel. Risk involves making a decision when you don't know what to do and not being certain of the outcome. The higher level of risk, the higher level of anxiety and the higher level of loss or gains involved.
Risk is easier when we have real information that we can analyse but when under uncertain conditions such as analysing the economy where past success does not determine future success and there are may variables that can influence outcome, risk can be influenced by your own biases. When uncertain, we can fall under the illusory pattern recognition where we see patterns that are not there. For example, where there is a pattern with eclipses and the stock market and the consumption of alcohol and the economy. While there are many investors that work hard to analyse the data, most of the market is random. Past success can create and illusion of control and increase risk taking. People who have an illusion of control and take more risks are more likely to fail to see the limits of their abilities and make poor investment outcomes while blaming external sources instead of their own limitations. Most successful traders won't take a risk when there is a lot of uncertainty but will stay with their stocks while there is volatility. Their choice is to do nothing when they don't know what to do. They will manage their emotions and allow the market to ride the ups and downs, while other people will make decisions based on their emotions which is usually driven by media hype. During volatility your best strategy may be to manage your emotions while not acting. It is important to understand the market, learn about strategy and how to you manage your own behaviour including emotions when trading. This also goes for managing money in general including learning how to stick to your budget, your relationship and managing emotions when buying or selling property and how your relationship to money is affecting your relationships to others. One way people will manage their emotions including anxiety is to predict the future, which is another fallacy. The psychology of risk involves understanding your risk tolerance and if you have a low tolerance for risk and there is high volatility in the market, then you may decide to consider not acting as your emotions will override rational decision making. Listening to your emotions is important but sometimes we need to step back and reflect before acting. Disclaimer: The information provided above is not financial advice but intended for general information only. If you need help with improving your financial literacy and support to improve your financial behaviour and mental health, contact us today. For specific financial advice you can reach out to a financial planner. Budgeting is often considered the same as a diet, as both consist of avoiding having the things you enjoy and cutting out items you want in life. This can be difficult when you enjoy your lifestyle and struggle with the thought of living with less. However usually with budgeting, you would consider it when life is financially challenging and you are looking for ways to cope. Budgeting should not be a reactive process but proactive and one to be practiced all the time.
To build wealth you would have to reduce expenses and increase income as well as make your money work for you through compounding. Budgeting is a part of this process, where you are monitoring your money so you will make sure that a certain percentage is placed for wealth building and you have a healthy cashflow to pay expenses, have money to invest and money for emergencies. How do you maintain the momentum to keep managing your money so you can maintain a healthy cashflow? Budgeting is structure. Structure is a normal part of life such as keeping your calendar working for you. As your calendar will help create structure so will budgeting. There are many strategies for budgeting such as the zero budgeting where there is no money left and every cent is for a purpose including in an emergency account, and there are many with percentage such as 50/30/20 percent where 50% is for needs, 30% is for savings, investments including retirement and emergency fund and 20% is for you. You can tweak the percentages to suit you. Another strategy is paying your small debts first so you feel successful in money management and then pay the bigger ones as you go, which is called snowballing. The strategy will depend in how you think, your momentum and past history. If you have a history of struggles you may lack momentum and belief that you can do it. Below is a list of cognitive bias that with awareness can help you stick to your budget and improve performance. Decision making Think of the way you make decisions and how to maintain self-control. You would need to wait for things and delay gratification when managing money. Delaying gratification is exercising a part of your brain that would take getting used to. It may be learning to ride the wave of urges and other unhelpful emotions that may cause you to spend on items you could live without. Create a positive reinforcement when waiting to enjoy your wealth. When you have maintained your budget, reward yourself with an activity that is within your budget and enjoyable. Decide on an amount you would reward yourself each week and enjoy staying in the black. For example, you may decide to save $100 per week and reward yourself for 1 hour every Friday night pampering yourself. Shift perspective Instead of focusing on the budget think about the cashflow coming in and building your wealth. Cashflow is king and the thought can be the driving force in changing your habit. Additionally focus on living the best life possible with what you have. Feel grateful for what you have and reward your achievements. Another perspective to shift is to realise that most people who have fancy cars and live an expensive lifestyle also have a mountain of bad debts. Bad debts are ones you can do without and where the assets depreciate. Good debts are ones where your assets appreciate. Money management can be a fun and rewarding experience because with enough financial literacy and support you can navigate the world a lot better, learn how to support yourself financially, become more independent and cope with life challenges such as leaving domestic violence or inflation. Disclaimer: The information provided above is not financial advice but intended for general information only. If you need help with improving your financial literacy and support to improve your financial behaviour and mental health, contact us today. For specific financial advice you can reach out to a financial planner. Personality can drive financial decision making and behaviour in finance. As a financial planner, understanding a client's personality can assist in the client discovery process. As a client, understanding your own personality can help you re-evaluate your risk profile, learn about your strength and weakness in money management and how to connect with the advisor. One perspective to consider when measuring personality is the Five Factor Model. The Five Factor Model includes openness to experience, conscientiousness, neuroticism, extraversion and agreeableness. A person can be within the spectrum of high and low of each factor. The Five Factor Model is useful as it can transcend cultures and languages and therefore support a diverse range of clients. It is also a valid and reliable self-report measure.
Personality tests will measure individual differences that can help understand how people think and behave. Theory can influence how personality is developed. For example, there is the biological theory where hormones or chemicals in the brain influences personality, then there are genes and the psychosocial theory where attachment and social relationships develop personality. There is also the self-regulation perspective where prior intentions influence behaviour and cognitions drive personality. While there are many theories it makes sense that each one has merit and suggests that personality can be stable when considering the genes but also change when considering psychosocial and self-regulation theory. A financial planner can understand a client's behaviour by using a personality test such as the Five Factor Model otherwise known as the Revised NEO Personality Inventory. For example, a client who is agreeable may not express his or her preferences as they want to be liked and don't want to offend others. The client may walk away with advice that does not meet their needs. To mitigate this problem, the planner can ask the client more questions to ascertain a deeper understanding of the client's needs. A client who is conscientious may be overconfident in their capacity to manage finance or may believe they have a high tolerance to risk. If a client scores high in neuroticism it may mean that they are overly anxious. You would then provide more information to help the client feel comfortable with the advice so they can make the right decision. You may also provide enough information in the Statement of Advice, which in turn will enable to client to hire you as they will feel supported. A limited Statement of Advice may not be sufficient. If a client scores high in openness to experience which correlates to intellect, they will ask more questions and may even know more than other clients. If you don't allow the client to ask the questions and become irritated, you may lose their business. However, a client who is high in agreeableness won't ask questions as they will worry that they are bothering you or may agree with everything you say while deep down inside are really not happy with the advice but will have trouble speaking up. However, that doesn't mean they are low in conscientiousness. They may be knowledgeable but want to be polite and not ask too many questions. A client who is low in agreeableness may complain a lot, become upset and seem rude as they are not overly concerned about being polite. If you knew early enough you can work with it but adjusting how you communicate. A personality test can allow you to gain enough insight to manage your advise that is supportive and in the best interest of your client. A person who is high in conscientiousness can learn that their strength is to seek knowledge, but if they are also high in neuroticism can learn how to manage their anxiety in money management and risk. If they are high in extraversion in the excitement-seeking facet, they may need to manage how they invest as it can influence decision making to seeking excitement rather than using a rational objective approach. In summary, a personality test such as the valid and reliable NEO Personality Test can give you a deeper insight into providing supportive advice to your clients and enable you to keep them longer by ensuring they feel understood. It can also provide those who want to manage their own money insight into their own behaviour to make better decisions. Financial literacy is teaching about finance. It includes teaching how to budget, investment strategies, retirement planning, estate planning, debt management and compounding.
Once you have knowledge about finance you then may need support to help improve your decisions around how to spend and make money. For example, hoarders have trouble with acquisition of goods and people who spend less time with their family and work too hard may have trouble with enmeshment with money. Your life experiences, your past, your attitude, your knowledge about finance, motivation, stage of change, and your life stage can influence your decision making in how you accumulate wealth and spend. Give yourself the time and space to get to know about finance and what gets in the way of have a better relationship with money. |
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