Suppose you wake up tomorrow with a sudden curiosity about stock market trading; you can flip open your laptop and access ample amounts of financial information readily available at your fingertips. Trust me, there is no shortage of self-proclaimed financial gurus claiming to help you “get rich quick.” While online resources can offer some valuable insights, they can also leave you susceptible to misleading advice that may lead you astray. The mental gymnastics required to sift through all the data can be arduous, and the diversity of opinions can make it hard to discern what is best for your unique financial situation.

You do not have to be an esteemed economist or a CFO of a Fortune 500 company to make sound financial decisions. You do not need to know how to analyze the stock market or have a stellar radar for predicting economic peaks and valleys. You need to understand yourself, what drives your behaviour and the decisions you make in your daily life.

Building good financial habits is not only an economic issue but also a psychological one. Psychology tells us that there is a constellation of interacting factors that influence the decisions we make every day, including what we do with our money. Our thoughts, past experiences, emotions, personality traits, social networks, and even our age influence our decision-making processes, whether we realize it or not. These effects are not only evident from our behaviours but can also be observed neurologically, particularly among brain regions associated with our reward system and our memory.[1] So, it seems that understanding these factors and their effects on our behaviour can help us make better financial decisions in our daily lives.

So, what is psychology?

There are many misconceptions about what psychology really is. Oftentimes, when people hear the word “psychology,” they immediately think about sitting down with a therapist to discuss their marital problems or taking an online personality test to figure out what type of job they should have. Well, that’s not exactly it. Psychology, simply speaking, is the study of the mind and behaviour – and the field is as broad as its definition. Imagine listening to a lecturer talk for over an hour about nasal anatomy. This expert has dedicated his entire career to studying the nose and its profound impact on how we perceive the world. The presentation delves into the intricate details of nasal structure and function, revealing surprising connections between this often-overlooked organ and our sensory experiences. The point is that psychology is not just what you might read about in popular magazines or social media. Psychology is about understanding who we are and why, and most of our behaviours can be explained by it.

And how is this relevant to my money?

When we think about how and why we make decisions, we are really thinking about cognition. Cognitive psychology is the study of our internal mentation, or everything that goes on inside your head. Our cognitive biases, recollection of past experiences, problem-solving abilities, and even our daily emotional experiences are all key factors that can subconsciously influence our daily spending habits and longer-term financial management. Understanding how and why we make certain decisions is so important that its study transcends multiple scientific disciplines, including economics and artificial intelligence.

Every decision you make has the potential to shape your financial future. Retail therapy, impulse buying, or aversion to risks are all examples of decisions you may make due to certain elements of your psychology. In this blog series, we will look at the psychology behind our financial decision-making and elucidate the science behind our lavish (or frugal) behaviours. The vast amount of published academic papers make up our current understanding of psychology and human decision-making; however, these papers are flush with technical jargon and, quite frankly, just plain boring to read. We will synthesize the wealth of information out there (pun intended) in concise, three to five-minute reads. By understanding the psychology underlying your decisions, you can build better habits that will pave the way for a brighter financial future.