Fantastic you might say, but what does any of this have to do with finance? Of course people sometimes fall for others who are not into them. Books have been written on the subject, magazines talk about it every week and give endless tips on how to find the right partner and better dates. There are even apps such as Tinder trying to ease these difficulties and make it more enjoyable. And the weather is an endless topic we can all relate to. So how does the psychology play a role for my financial decisions?
Let’s start with how psychology influences your reaction to a financial windfall.
Money and the psychology of happiness
Remember how you felt the last time you found money in the street? The awesome feeling as you were strolling down the road, unsuspecting, when suddenly, right in front of you, you saw a € 10 bank note.
As you reach down to pick it up before it gets get blown away and store it safely in your pocket, you feel a slight boost of happiness. You continue walking with a smile on your face, feeling that bit happier.
The next few minutes, as you continue down the road, your eyes wander more intensely in the search of a bit more cash.
A few hours later, as you share the day’s events over a nice dinner in a restaurant, you tell your partner about the lucky find a few hours earlier. As you commence your tale, you again feel a boost in happiness. The same that you had felt when you picked up the € 10 note and safely stored it away in your pocket.
The next day you walk into a store to buy clothes for € 150. As you unpack your bag at home you notice that the cashier charged you too much for your purchase; € 4 too much.
You feel annoyed. Even more so when you realize that the cashier forgot to put the receipt in the bag. After some reflection you decide it will be too much hassle to get back the money. Particularly, as it is almost impossible to make time in your busy schedule for another trip to the store.
You dismiss it as an unfortunate event. Still you are agitated and somehow the happiness of becoming € 10 richer through a lucky incident the day before has slipped away. Today, you simply feel cheated.
As the negative feelings wear off you rationalize: You are in fact still € 6 richer than you were just one day earlier. And even more so, the shop you bought the clothing items from was a tiny boutique; no big chain. Maybe they could really do with the extra € 4; after all the items were on sale and marked down by 50%. Times are tough for most anyway so if you can support a small entrepreneur, even better. Next time you’ll just pay more attention to how much change you are given.
You turn towards your clothes and feel content. You acquired both clothes on sale and part was even paid for by the money that you had found the previous day.
Your reality and emotions have been altered by the most powerful psychological force: yourself. Anger became content.
The subconscious power
In fact, the way we think is the only path to happiness; whether financial or any other type of happiness. Understanding the psychology behind our feelings, emotions, reactions, and behaviors opens up endless doors to happiness and satisfaction in all areas of life.
But most of it occurs subconsciously.
Remember the last time you drove back from work? Can you recall every corner you took, the buildings you passed, the cars waiting beside you at the traffic light, or even the speed you went? Most of these decisions and behaviors are controlled by your subconscious. In fact, we should consider ourselves lucky that our brain is so wonderfully advanced that it does most of the work without requiring our conscious effort. We don't have to invest energy or time to contemplate and make decisions. Every day we walk, talk, behave in certain ways without having to think about it. It’s great, isn't it?
Some might call it gut feeling, but in psychology it is called intrinsic knowledge. Knowledge that you have acquired throughout your life that determines how you feel when, for instance, unexpectedly finding money, traveling back from the office, and even finding home when being too tired or drunk to think straight. But most importantly for your wealth building, it affects the way you go about investing.