Tuesday, May 28

Financial Psychology: The Art of Knowing How to Invest

If you want to make smarter decisions about money, you can benefit from learning a bit of psychology. Experts in this field have been dissecting consumer and investor behaviour for decades. Today, there are plenty of insights that can improve your relationship with money.

Whatever your situation, this knowledge will help you grow your wealth. Humans are irrational things by nature, and they make poor decisions with money all the time. Discover the way psychology and finance are connected. These takeaways will help any trader or investor in India.

When Economics and Psychology Come Together

Psychology and economics are pretty different subjects. The former is concerned with human behaviour, emotions and cognition. Economics studies the ways we produce, consume and transfer wealth.

Both sciences examine our behaviour. They also factor in human needs and provide clues for those who want to live better. Professionals analyse the ways we make decisions. Yet, they look at them from different perspectives and use various research tools.

Definition of the Science

Financial psychology is a fusion of the two fields. It focuses on our money-related behaviour; its subject is the interactions between human nature and the markets.

Why is it useful? It reveals typical obstacles, preventing people from making wise decisions. This includes factors and biases that exist beyond our consciousness and the environment we live in. 

Often, what causes a dysfunctional relationship with money is within us. Humans are their own arch enemies if they do not take care of their emotional well-being. Here is why.

Losers Let Emotions Take Control

Traders are advised to take a break when they experience strong emotions. This is because sadness, joy, or greed can cloud your judgement. For instance, when the market is in panic, investors short-sell their assets without much thinking their behaviour is only driven by fear of losing more capital.

Forex trading is extremely profitable, but only for traders who are mindful and self-aware. They base every decision on rational analysis. Brokers like ForexTime provide free demo accounts for the best forex trading platform in India. Their clients can get used to the market environment without risk. When real trading begins, emotions affect their decision-making, so be prepared.

Don’t Be Naive

Trust must be earned. Do not invest in a venture you know little about. This is recklessness, and it may cause low returns or even losses.

Look on the Bright Side

 All too often, online traders start chasing their losses, which only exacerbates the damage. When a trade fails, they need to take a step back and take a hard look at their actions.

Losses should not frustrate you too much. In investment, they are inevitable. The key is to minimise them, rather than avoid. Every crisis is an opportunity to learn and get better at what you do.

Learn from Your Own Mistakes

If the loss was unpreventable, just accept it and move on. If it wasn’t, learn lessons and hone your strategy. Avoid repeating your mistakes this is the most foolish thing to do. If your actions are the same, the results will be identical.

Do Not Be an Obsessive Perfectionist

Nobody is perfect, and even experts occasionally make the wrong decisions. If you strive for absolute perfection, you risk getting too upset to go on. Know your own mind, and be aware of your weaknesses. Think of risk management, not risk elimination. Accept the fact that force majeure events may interrupt your winning streak.

Why You Need to Study Financial Psychology

Investors familiar with the key principles of financial psychology achieve better results. They act mindfully and make sure their decisions are based on calculations, rather than impulses. These people can:

  • achieve a higher ROI;
  • remove obstacles and psychological barriers in the way of progress;
  • improve their understanding of finances and personal relationship with money;
  • identify behavioural problems underlying bad decisions;
  • understand typical mistakes in investment behaviour and ways to avoid them;
  • feel less stressed.

Final Words

As you can see, knowledge of psychology will improve your financial decisions and life overall. Investment is an art, and it cannot be mastered by those who are oblivious to emotional stimuli that drive their actions. As you learn more, your relationship with money will gradually improve. You will make wiser decisions and achieve better results.