8 Ways to Improve Your Money Mindset
The Psychology of Money: 8 Ways to Improve Your Money Mindset
August 31, 2022 by Sam Stone
As the old saying goes, personal finance is ‘mostly personal and a little bit financial.’
Long-term growth and success rely more on our habits and behaviors than on complex knowledge and advanced strategies. Learning a few key points on the psychology of money can go a long way to building the right mindset for prosperity. Let’s look at a few far-reaching psychological concepts that play an outsized role in our financial lives, including some of the biases and fallacies that can point us in the wrong direction.
8 Crucial Money Psychology Concepts
Human cognition can be messy. Each of us carries a collection of cognitive biases, irrational beliefs, and behavioral quirks. When we make decisions about our money, this can, unfortunately, lead us down the wrong path.
Understanding each of the money psychology concepts below will help you approach your finances more rationally and avoid some of those poor decisions that stem from cognitive bias.
Optimism Bias
Optimism bias is the natural tendency to overestimate the likeliness of positive outcomes and underestimate negative ones.
In terms of money, optimism bias can lead to reckless decisions and insufficient planning. That can include:
Investing heavily in risky products
Carrying insufficient insurance
Taking on excessive consumer debt
Ignoring your emergency fund
No one looks forward to dealing with failed investments or significant unplanned expenses (like vehicle repairs or medical bills), but the risk is there. When misfortune does come, this optimistic bias leaves us in a precarious position.
The ideal approach to finances is to hope for the best but prepare for the worst. It’s great to be optimistic, but not when it gets in the way of sound decision-making.
Pessimism Bias
The polar opposite of optimism bias – pessimism bias – can also play an insidious role in our finances. Pessimism bias, (also known as negativity bias), draws our attention away from positive circumstances and causes us to weigh negative stimuli more heavily.
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