Behavioral finance FAQ / Glossary (Psychology)

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Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
i: incidental

Psychology (of investing,
   markets, money...)

(economic, financial) Psychology

01/3i,4i + see finance,
personality, style,
profile, risk, bias

Happy or unhappy feelings towards money.

Psychology studies how our mind works and its role in our

Quite nosey, inquisitive and ...fascinating!

Useful also:
better know what makes you decide and behave!

The main purposes and fields
     of human psychological studies

Are we all cuckoos?
Or are we all normal in our own way?

Let us face it, those studies tend to privilege a medical approach.

They rest often on the idea that some flaws need to be cured (psychotherapy)
in those mental and behavioral processes.

Repairing the soul at the psy-garage.

Of course, those research works have also other goals, such as to take
into account
human motivations and reactions in various areas of
, those related to economics among others (investing, marketing,

If we take human psychology (we are not here to study the psychology
of eggplants), there are several black boxes (for example the brain
subconscious activity and engines that make people decide and

Cognition (see that word), driven by memory and 

reasoning, is obviously an important player,

Feelings (pain and pleasure) and emotions
                (see that word).

Hope and fear, love and hate, among others.

They play an even more crucial role in behaviors.

Automaticity (reflexes, habits, "instincts") also plays
                a part.

Yes, we are often on autopilot, if not we would not

Money psychology

Neurons as bookkeepers

Money-related pains, pleasures, loves and hates are among the phenomena
studied by psychology.

Of course, not only emotions, but also cognition is affected by money.

This article focuses on

  * generally the psychology of money and finance,

  * a derivated topic, the psychology of markets

  * an even more special one, the psychology of investment.

Those disciplines try to describe generally:

What people feel and think about money, thus their (positive
   or negative) attitudes ( appetites /
   reluctances / preferences)
towards money and activities that
money: working (for money) / spending / saving /
    investing  / borrowing/

How those opinions and feelings, whether conscious or

unconscious strong or weak, orientate decisions
(choices) and behaviors

Caution: try to detect what drives you: your brain,

your heart or your guts,when you decide, and of course
when you invest!

What psychological and behavioral similarities and

differences there might be between players

How social influences (peer pressure, herding...)
    might affect
them, here we enter social psychology (see that

Money sociology

A small step for the purse, a big step for mankind

The invention of money, a long, long time ago,
brought widespread social relations
that went beyond clannish autarchy,
and added complexity to people thinking.

It enriched the mind with many notions.

Money related ideas and attitudes have found their way
in philosophies, ideologies, political programs, literature.

Even if this is sometimes denied, the civilization effects of money have
been more fruitful than harmful.

Inventing money was one of the greatest feats of all times,
and in parallel an endless source of intellectual controversies.

Let us not forget that the invention of writing, an event that
started what is called History
, was made seven thousand
years ago by Mesopotamian traders to keep their accounts.

Money-related individual attitudes

How the mind drives the wallet

A field like money seems at first sight to be the realm of rationality, driven by
pure economic interests.

But strange money behaviors are common, some rather light and i
nnocuous, others rather extreme, or even verging on madness.

For example, on the light side, many people are reluctant to buy
with cash, feeling deprived when it leaves their pocket, but they
hesitate much less to buy when it is charged to a credit card.

Actually, the human factor, which is far from being exclusively rational (see
that word), is crucial in money matters.

To start with individual attitudes (*), here are some key money-
related human phenomena:

Its feelings and emotions related to money and

its related activities: pleasure, pain, mimicry, pride or shame, greed
or fear, empathy or egotism...

The monetary goals   of each person: striving at

getting more money, or pursuing other quests,

Its attitude towards risk , a crucial factor in monetary

Its preferences / choices between the various money uses

and between the various money management styles

Consuming, borrowing, saving (itself leading a range of

choices: from hoarding to investing), donating, gambling...

Not to forget time preference (privileging short term or
long term).

Its outward attitude towards its own wealth, such as showing
    off or being secretive.

This is an individual tendency but also a matter of culture (and of
economic system),

Also its attitude towards other people's wealth.

(*) Having in mind that:

Reasoning, attitudes and behaviors might differ ,

people might think in a way, feel in another way and decide /
behave in a third one.

Often, they don't even stick to their hierarchy of preferences (see that

Well, don't be discouraged, there are things that you can predict
about what people will do (for example in markets), but with a
large margin of error.

Individual factors do not explain everything, social
are crucial also.

Economics is related to social behaviors, via social institutions (markets,
businesses, administrations...).

Economists (at least behavioral economists) dig therefore into collective
(see social psychology, wealth effect, money illusion...).

Investor psychology: rationality, biases, styles

To illustrate the "bias" word when money is at stake

At the difference of other life situations (for example, interpersonal relations
are naturally emotional), finance in general, and investing in particular, are
supposed to be based on hard facts, numbers and cold rational

But this is far from being always the case:

There is nothing like money to induce cognitive

and emotional biases in individuals

behaviors as well as in social behaviors.

Also, there are many differences between individuals (except when they get
over-influenced by the group).

Some psychologists, using social science psychographic, have been working
at attempts to classify money personalities / investment styles
(see "profiling 2", "style" and eprofile).

Obviously the risk attitude (see risk) is one of the key criteria to categorize
those styles.

Moreover, to know those biases is not enough for investors to avoid

They need also some self discipline (see self control, and also objectives
and precautions.

A thing we might need in real life also. Maybe money managers show
us the way to ascetics ;-)).

Specialized fields of research

Money slices.

As seen above, money psychology has specific aspects linked to the domain
of activity involved, for example market psychology, investment psychology,
consumer psychology...

But more generally we can isolate two main fields of research, notions
and methods, two "umbrella brands" used by academics and

Behavioral economics.

It deals with the psychology of consumers, producers, workers,
public and private managers,

Behavioral finance.

It deals with behaviors linked to investors (and borrowers) and
financial markets.

Actually, BE and BF are rather similar fields, with rather similar research
and that share common paradigms.

All what this glossary is about, by the way.

The common quest of those psychological researches is to detect:

1) What makes all those economic / financial players

feel, think, make decisions and take action.

(this last thing, action taking, is the behavioral part).

Here we have "Psychological BE / BF", or more simply
"economic / financial psychology".

Neuroeconomics and neurofinance (see those words) are
more and more implied in those researches.

2) What are the effects on economic and financial

Here we have "Quantitative BE / BF".

Those various studies have a main common

approach (we could say a ...bias),

which is to detect ...biases.

What are called behavioral biases (see that phrase) are decision
motivations that do not fully fit
what is considered rationality
(economic and financial rationality, often seen as a type of self-
interest, in the case of BE/BF).

Psychosociology / Psycho-sociology

See social psychology

(*) To find those messages: reach that BF group and, once there,
      1) click "messages", 2) enter your query in "search archives".

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This page last update: 24/07/15  

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