I recently attended a financial planning conference, which offered several excellent sessions on the topic of behavioral finance.
Broadly defined, behavioral finance studies the science behind how people spend or invest their money.
I’ll admit that I don’t spend a lot of time thinking about the factors which most influence my own financial decisions. The thought that someone would take the time to study these behaviors in depth is quite a surprise to me.
What do they think they might learn?
For starters, the way we invest or otherwise spend our money is probably a close reflection of our personality and our lifestyle.
Let’s consider ‘Bob’, who is a marketing executive and loves to engage in conversation – especially those involving persuasion – but who has little time or interest in reading outside of his work. He may be more inclined to spend his money more freely, relying less upon a budget, thinking about financial goals or looking at the individual components within his portfolio.
Next let’s consider ‘Mary’, who is a paraplanner. Would it surprise you to learn that she follows a detailed system for tracking her spending and comparing it against her planned budget? And, yes, at the beginning of each year she reviews her overall financial goals for the near and long term, adding or adjusting individual items, as appropriate.
‘Shari’, a teacher, makes some investing decisions easily and quickly. Yet she also relies upon discussions with her husband before making some larger investing decisions.
‘Joe’, a biomedical research specialist, spends a great amount of time in reviewing analyst reports, market fundamentals and technical data on an individual company before being ready to make even a small investment in a company’s stock. It seems that he never quite finds all of the favorable elements present as he would like to see. As a result, cash comprises the largest portion of his portfolio.
As insights from these individuals may suggest, some are fairly comfortable with making money-related decisions. They weigh the potential outcomes against associated or ‘known’ risks present and then proceed accordingly. Whether a loss-averse individual or a risk-averse individual, they frequently rely upon similar thought processes regarding both general spending and investing decisions.
Take a few moments to think about your own money behavior and how you make decisions related to it. Does it largely reflect your own ‘personality style’? Does it reflect your parents’ attitude toward money? Can you identify patterns? Can you pick out an area or areas that you would like to improve upon?
For the next month make a commitment to follow up in thinking about your own money behavior. In what ways might you like to improve? What action steps are needed to guide your progress toward that improvement? How will you measure the progress achieved? How can you repeat and improve upon this process for the following month?
Taking small steps such as these will lead to your being more closely attuned to your money behavior. And reinforcing positive steps will lead to more positive outcomes. Are you ready to take those first few steps?
Have questions about where to start or how to interpret your behavior? Give us a call. We’re always here to help.
Image Credit – Chris Potter