Economic Psychology: The Skill Of Investing

If you want to make wiser economic choices, take advantage of the resources provided by economic psychology. This area of ​​research provides strategies to help you make the best possible monetary choices.
Economic psychology: the skill of investing

Whatever your financial situation, you should always learn how to manage your money. According to psychologists, people naturally make a lot of mistakes when it comes to money. Thus, economic psychology could be your new best friend.

In this article, we talk about the relationship between psychology and monetary affairs, what economic psychology is, and what are the benefits of managing money. Don’t be your worst financial enemy! Instead, check out these tips and apply them to your life.

Economic psychology in a nutshell

Psychology focuses on the cognitive, behavioral, and emotional aspects of a person. Economics, on the other hand, is “a social science that focuses primarily on describing and analyzing production, consumption, and the transfer of resources” (Merriam-Webster).

What is the relationship between the two? These both study people and believe that people behave in a way that promotes their well-being. Both of these also take into account people’s needs and how to identify with them in terms of improving life.

the gray and brown figure merge

Psychology vs. economics

Thus, both disciplines seek to analyze behavior and how this influences decision-making. The difference is that these sciences do it from different perspectives. For example, economics seeks to describe collective behavior, while psychology focuses on the individual. In addition to this, the research tools are quite diverse. Economics relies more on the deductive hypothetical method. Margarita Billon Curras from the Autonomous University of Madrid wrote about this in her article “Psychology and Economics from a Multidisciplinary Perspective”.

Psychology, on the other hand, relies more on health research and looks at cultural influences, consumption, and people’s relationships to materialistic things.

However, these two disciplines have a common ground. Here is a characteristic list of all common interests:

  • Consumer behavior.
  • Publicity and marketing.
  • Individual differences.
  • Economic socialization.
  • Policy.
  • Corporate behavior.
  • Financial markets.
  • Decision.
  • Identity.
  • The importance of money.

What is economic psychology?

Economic psychology is a discipline that studies money-related behavior. More specifically, it analyzes the interaction between human nature and economic markets.

By analyzing people’s behavior, it reveals the psychological barriers that influence economic choices. As a result, it provides an insight into people’s actions, which can help everyone be more financially aware.

It also recognizes the unconscious side of money-related decision-making. This can help us be more confident. Economic psychology does not only study the individual, but it takes into account environmental impacts and how we have been raised.

Don’t be your own enemy

James Montier is one of the best known investors today. In his book The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy,  he talks about people’s relationship to money and how to change behavior to overcome obstacles.

Here are some steps you can take to stop being your worst enemy:

  • Control your emotions. By doing this, you can avoid chaos that could lead to losing money.
  • Don’t trust too much. If you are not careful enough when investing, you will end up getting a lower return than you expected.
  • Focus on the positive. Don’t let the losses discourage you. It’s better to let the losses go past you, and focus on something more promising. Try not to make mistakes that you know will hurt your investment.
  • Avoid doing the same thing over and over again waiting for different results. A better option would be to look closely at the situation, make assessments and then take action.
  • Face reality. Everyone makes bad financial choices at some point. Let go of them, but be confident. For example, if you have to make choices, don’t let your emotions affect them.

Our personality has to do with this

On the other hand, it must be borne in mind that we are not perfect, nor should we be. It is important that we know ourselves, are genuine, and use strategies that develop our well-being.

It is also important to know that there are unconscious mechanisms in our relationship to money. Our personalities also have something to do with this, and for this reason some people have difficulty making good financial choices. So let’s not be afraid to ask for help. We can contact a financial advisor or an economic psychology expert for advice on how to be more confident.

a plant grows in a money box

Benefits of economic psychology

There are benefits to applying the principles of economic psychology or advice from a financial psychology professional. These include:

  • Higher return on investment. 
  • Understand why you are making choices that are detrimental to your investments.
  • Get over financial barriers.
  • Increase financial awareness.
  • Understand the behavioral problems that make you make bad choices.
  • Investigate your financial behavior.
  • Understand your relationship to money.
  • Identify psychological barriers that influence money-related choices. 
  • Learn from your financial mistakes.
  • Be more persistent.
  • Release the tension.
  • Identify the most common investment mistakes.

Finally, bringing economic psychology to life teaches the great skill of investing. While investing isn’t easy, it’s a lesson we can learn step by step. Every choice we make tells us something about ourselves.

Economic psychology helps us to be more confident with money. Thus, it is a great way to understand our relationship to money and know which path is most beneficial to us.

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