The Psychology of Money

Your Mind Creates Your Money - written by Ryan Sobel

Often times a person’s psychology and brain chemistry has a greater effect on their financial future than any other factor. Many of the people who fall short of their financial goals have done so because their brain was not functioning at its optimal capacity during one or more periods in their life. In many cases, for a person to achieve their financial goals, it requires them to have the mental fortitude to successfully navigate several phases.

First, a person’s brain must be healthy enough and have sufficient motivation to earn an income that is high enough to have the chance of achieving their goals. Unfortunately, only a small percentage of Americans ever earn enough income to do this. The potential blocks to earning a higher income are numerous and while many of them can stem from a person’s upbringing and socioeconomic background, it is interesting to note that an extraordinary number of people ascend from the depths of family poverty and are eventually able to accumulate and retain significant amounts of personal wealth.

Clearly, something is different within those who can achieve this feat compared to those who are not. To summarize what could potentially consume hundreds of pages of explanation, those who can break this cycle usually have superior mental capacity and drive. The latest research in neuroscience is beginning to reveal that our brains are far more malleable than what was previously believed and that it is possible for most people to dramatically improve their performance through a variety of methodologies. Due to the recent advancements in brain enhancing techniques, it is now possible to not only pull people out of seemingly insurmountable challenges but also to take those who are already succeeding and propel them even further forward to unprecedented levels of accomplishment. Regardless of the path, once someone has attained a sufficiently high income, they are now posed to utilize their earnings to fuel their financial future.

Unfortunately, many of those who enter this space end up spending most of or all of their income on their lifestyle and at the end of the day end up with little to no assets to show for it. This usually happens because oftentimes, people will begin to use their money in an attempt to purchase things that they believe will bring them happiness and avoid sadness. Most of the people who employ this strategy find that exchanging money for happiness only provides momentary exuberance and relief and that the more they do this, the higher and higher amounts of money are required to have the same effect. Without a course correction, the unaddressed psychological underpinnings of this behavior can continue to prevent long term wealth accumulation and usually results in a low net worth coupled with ongoing regret and guilt from the squandered opportunity. Successfully navigating this phase usually requires a high level of self-discipline and is often aided by having a brain chemistry in which long term commitments can overcome the short term dopamine spikes that contribute to impulsive behavior. Some are lucky enough to be born with such brain chemistry but for many, achieving this requires significant effort to adjust and improve their psychological and chemical state.

Those who successfully the first two phases now find that they have a third and final demon to contend with. This final demon has to do with the psychology required to manage and preserve large amounts of accumulated wealth. The emotionally destructive forces that diminish large nest eggs usually involve varying degrees of fear, greed, and pride. These emotions are often exasperated when the creator of this wealth leaves their longstanding career and retires. In retirement, many of the productive psychological processes that allowed them to build the wealth in the first place are still operating and often this includes the desire to accumulate even more wealth. In many cases, this desire that was once satisfied by their career success then manifests in a continual obsession with growing the size of their investment portfolio. As this unfolds, the gains and losses in this account start to redefine the investor’s sense of self-worth. Gains can be gloated about to others and reveled in as a sense of accomplishment while the losses invoke feelings of inadequacy and often bring up fears of scarcity. As the intensity of the guilt/pride dichotomy increases, investors become increasingly susceptible to speculating and gambling with their investments. As this happens the loss of long term perspective and prudency is often replaced for the desire for short term gains as a means of strokes for personal self-esteem. Without intervention this pattern has the potential to erode away millions of dollars of wealth, destroy the happiness of the investor, and waste countless amounts of time and emotional energy that could have otherwise been deployed in more fulfilling and productive ways.

This final challenge is most easily surmounted if the retiree is able to re-frame their view of their money and view it as an access for them to fulfill on their true purpose for life. Doing this, shifts the source of their self-worth from that of wealth accumulation to deriving their self-worth from the contribution they are now able to be in society. Interestingly enough, if the investor has a well balanced and prudently designed portfolio, shifting their focus away from their money actually increases the chances of accumulating even more wealth to pass to charity or future generations.