A financial windfall is, unfortunately, a rare occurrence. Fortunately so is being given too little change. But every day we are exposed to the psychology of finance whether we are aware of it or not. Every time you check your savings account or mortgage rate, you either awe or not. Some might feel disappointed over the low interest rates they receive for their savings, while others feel happy about the extremely low mortgage rates they just bagged when signing their mortgage contract.
Others, however, do not experience any feeling of any kind. So why these differences in emotions?
Saving rates and life experience
Why do some experience positive or negative emotions while others have no such reaction when looking at their savings or mortgage?
In fact, it is again your vantage point. Your vantage point is where your life’s experiences have steered you. On your journey through life you have accumulated massive amounts of knowledge. Knowledge that is, at most times, not conscious, yet drives your decisions and emotions; just as when you find money, go on dates, or talk about the weather.
That subconscious knowledge is called intrinsic knowledge in psychology. Intrinsic because it finds its ways to your conscience rather seldom. You are driven by factors and experiences you often don’t even recall.
These life experiences drive your reaction to market developments and even aspects as simple as interest rates. It is a decisive factor for rushed decision making in share trading and even the belief that interest rates will never be high enough to make saving a viable option to build your wealth.
Recently Mrs. CF and I were looking for saving alternatives for money that we had saved for a property. My beloved better half was disheartened by the minuscule interest paid in most savings accounts. She someone could not imagine that this would ever change. For her the tiny interest was reality influencing her beliefs that savings would never bring real returns.
When I told Mrs. CF that a few years ago I had received 8% interest on my savings account, she laughed in disbelief. But in fact, a bit more than seven years ago I received interest so unbelievably high that in order to get even close to these returns today one has to take big risks.
Times were very different. But for that reason I view the minuscule interest rates as a temporary phenomenon. Mrs. CF, on the other hand, has never seen saving rates as high as 8%. To her interest rates in their high single digits seem farcical.
But as there is relatively little we can do about interest rates, our life experiences have an enormous effect on our investment decisions.
Your subconscious and winning the finance game
In the stock market these psychological aspects are called behavioral finance. The science of trying to understand stock market moves and share price developments. What drives the market and a stock, what are the triggers? These are the questions behavioral finance asks from a psychological viewpoint.
To a large extent, stock prices are based on investor perception of the value of a company and share. Where investors believe the company will go, what directions and strategies will be implemented that could affect the share price, and the the world economy and politics will influence the stock market or particular shares.
Whether any of this will indeed crystallize or affect an individual share over the long-term is a matter of psychic ability. We can anticipate, but not know for certain what one event will or will not do to our portfolio.
Frequently one analyst’s decision, a particular point on a technical share price chart, or certain news significantly influence a share price. Often these factors have a very limited and short lived influence and the same news might be interpreted as good or bad just days later.
This is where our intrinsic knowledge and own vantage point that also influence our dating and happiness play their role. Depending on our experiences, perspective, and personality, the interpretation and the subsequent reactions are significantly altered.
Take for instance one of the biggest global insurance companies, Allianz. On April 24th, 2015, an analyst declared them to be overpriced and suggested that the value of their share price should be about 10% lower. Consequently the share price fell by over 2%. Now what would you do if you were a shareholder in that company?
It would entirely depend on your mentality. Your previous life experiences, intrinsic knowledge, and vantage point will determine your next investment move.
If you strongly believe in the company’s business model, you are likely to hold on to your investment. If you, however, are influenced by that one person’s opinion and the price drop, you might feel panic and sell.
What, however, if you knew that only two weeks later you were guaranteed 4.8% dividend return making up more than twice what you had lost that day only because of a temporary market reaction to an analyst’s perception of the world? Would you still sell and join a temporary phenomenon or would you stick to your guns and hold the stock a few more days?
Always keep in mind that your actions and emotions are influenced by your subconscious. Take the time to reflect upon why you are behaving and thinking in certain ways and it will open up new ways of interpreting your reality, life, savings, and investments.
