Money psychology, financial psychology

Emotional wallets and markets?

Money is a rational tool that is often used irrationally.

Money can be a source of emotions, cognitive flaws and collective
anomalies.
Choices between spending and saving, or between several types of
purchases or investments, are often influenced by behavioral biases.

Those flawed decisions can not only have negative effects on personal
situations but bring also some market price and return anomalies

sous  brain  Money has two masks  faces,
One rational and civilized.
The other fanciful and wild.

1. A social tool and assumed rational
    instrument

Mankind and money

A related article describes the nature, traits and creation process of money
Money is - this is not a big discovery - a crucial tool tool in many
social activities and relations.

The most obvious ones are economics and finance.
Historically, money was a decisive bulb invention for mankind.
Without it, exchanges and investment would have stayed embryonic.
Economic development would not have taken place.

But that's not all !
Maths and writing - those essential civilization tools which
creation made the transition between Prehistory and History -
would still be in its infancy if 7000 years ago a few Mesopotamian
accountants did not take the initiative to make contracts and
records on clay tablets.
If civilization progresses just a bit more, one day we might see in
public squares as many statues of accountants with their abacus
than of generals showing their sword.

Rationality and money

Its "technical" role (as a tool to measure, exchange and store riches) makes
that money, whatever the subjective traits we will develop below, is
based on rational needs and has fully rational / practical aspects.

For this reason, and also because money is expressed with ...numbers,
highly mathematical theories (some effective, some other dubious)
have been built on it.

2. But also a source of emotional biases,
     cognitive flaws and collective anomalies

Battles of neurons

At the same time that it is an objective mathematical tool, there is nothing
like money to activate some human feelings, to distort reasoning
and in general to make neurons whirling.


Emotion
(attraction, aversion and many others) and cognition
(reasoning, memory) might incentive get wild at the sight of money.

Also habits and reflexes might override thinking.

Emotion and cognition are often pitted against each other, for example
when choosing between spending and saving (or between types of
purchases or investments).
 
=> Then emotion often takes the lead.

This can bring
sillymad irrational decisions and moves.
On the other hand, emotion are incentives to do things, without
them we would be mostly passive.

What about the economic incidences?

The "economic man" that we see in the real world, not the theoretical one,
is not coolly rational nor fully driven by self-interest.

Not only the human being, in its economic behavior
(and most
other types of behaviors), is emotional, but it is also "under
 influence"
.

Here mimicry plays an important part, at the interpersonal scale but
also for entire 
group groups of people.

Various collective emotions, conventional thinkings, widespread rites,
tend to affect monetary attitudes and practices.
They have deep influences in driving economic evolutions.

What about investment psychology?

Those psychological aspects are particularly noteworthy when people
enter the investment arena:
They affect many traders (and investors, and also borrowers,
as was seen in the subprime crisis).
They make them sometimes underperform and they can
even cause disastrous decisions.
  • More generally, those biases tend to become collective
They bring price and return anomalies
They make markets less efficient than what the standard
financial theories state.

Details in the main article on that topic:

Behavioral economics and finance

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M.a.j. / updated : 17 Sept. 2015
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