Understanding Behavioral Finance: How Emotions Affect Financial Decisions
Written by
Laura Bogart
Edited by
Gary Dudak
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When you think of building wealth and creating a sustainable financial future, you likely imagine the numbers of your bank account acquiring more commas. To get those commas, you anticipate having to work hard and make the smartest strategic decisions. However, enjoying the fruits of your labor can involve planting some seeds of awareness about how you approach your relationship with money.
Understanding how your emotions impact your financial decisions can help you create stronger habits and overcome the areas where you’re still feeling restricted. To learn more about how your feelings can influence your money moves — and overcome limitations — GOBankingRates talked to Alejandra Rojas, founder of the Money Mindset Hub. Here’s what she had to say about behavioral finance.
Understanding That Emotions Impact Your Financial Decisions
While it’s easy to think that logic alone governs your financial decisions, all human beings — yes, including you — are emotional creatures. The way you feel about everything, not just money, can dramatically impact the way you save and spend. Rojas said that emotion is actually a major driver of human behavior when it comes to money.
“At the root of our financial actions is often an attempt to either fulfill a particular emotion or avoid an unpleasant one. This means that our emotional state significantly influences our financial behaviors, often overriding logical steps with money,” she said.
People Can Have Trauma Around Finances
Having bad experiences with money and financial stability can give you more than just a pessimistic attitude, it can actually be traumatizing. According to Choosing Therapy, “… financial trauma refers to the distress associated with chronic money-related stress, lack of resources, or financial abuse. These difficulties can overwhelm the ability to cope with stress, thus leaving many stuck in a state of heightened anxiety, fear, or anger.”
Rojas described people looking at money through the lens of financial trauma, where negative experiences create lasting negative emotions, as an unintentional motivator in people’s financial behavior.
“The mind, in its effort to avoid experiencing that same negative emotion again, can lead to actions that are not always in the best interest financially,” she said.
Shame Is a Big Factor To Overcome
In her work with clients, particularly women entrepreneurs, Rojas has seen upfront that shame and guilt are some of the influential emotions in shaping people’s financial behavior.
“Shame is a deeply rooted emotion that often comes from societal expectations around money. People may either act or avoid actions with money to avoid feeling ashamed, and this can dictate much of their daily financial behavior,” she said. “Similarly, guilt can cause individuals to override their own financial boundaries, leading to decisions that might not serve their financial goals.”
People Can Truly Change
The good news is that even the most negative and unhelpful financial attitudes can be overcome, once you understand the emotions at the heart of the behaviors you want to change. As Rojas described the process, the first step is looking at the emotion tied to a specific financial behavior, and then understanding the mindset or perspective you’ve acquired around that emotion.
“Understanding and addressing the emotions at the base of financial behaviors is crucial for creating lasting changes in how people manage their money,” she said.
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