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.
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AuthorArticles about mental health, money and behavior Archives
February 2024
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