The Psychology of Money

When it comes to money, wealth and well-being, there is an obvious paradox that stops us from understanding the reasons behind the many cases of bankruptcy we witness every day: if the financial industry is governed by scientific and mathematical rules, how is it that some people simply do not adhere to them, perhaps even going so far as to lose everything they own? The author Morgan Housel, expert in behavioural finance, has an answer: assuming that the finance industry and money markets do follow mathematical rules, we should not forget that integral to these is the human component, where irrational behaviours come into play. And as humans, we are not governed by unyielding regulations, but by the elastic and fluctuating laws of our emotions, feelings and fears: hence, money markets and finance step out of the world of science and into the sphere of psychology.

And it is in this very context that, at first glance, we find the explanation for certain unexplained events: all the decisions that an individual makes, whether they have positive or negative implications, are always based on good intentions. The point is, where do the roots of this good intention lay? It may well be a good intention arising from rational and precise calculations and planning, but more often, it is influenced by fears, anxieties and insecurities.

Without taking these factors into consideration, it will be difficult to maintain control over your financial situation: we need to understand the psychological mechanisms, the biases and the preconceptions behind the financial decisions we make, to avoid making bad choices and paying the bitter consequences.