Why personal finance is more personal than financial

Eighteenth-century writer David Hume became one of the world’s great philosophical voices when he hit upon a key fact about human nature: We are more influenced by our feelings than by reason..

Although possibly an insult to our own image, Hume believed that we can all be much happier if we learn to deal with this surprising fact.

His philosophy is based on a single powerful observation: the key to doing things right in life is feeling rather than rationality.

Sounds like a strange conclusion.

Traditional learning assumes that you need to train your mind to be as rational as possible; be dedicated to evidence, logical reasoning, and committed to keeping feelings from getting in the way.

But Hume insisted that whatever we aspire to, “reason is the slave of emotion.”

Fast-forward 250 years and Daniel Kahneman, winner of the Nobel prize in economics, agrees that when it comes to our money, we’re also much more motivated by our feelings than by analysis and logic.

So, both in money and in life, few of our core convictions are driven by fact.

What to do with our money, how to invest, what constitutes a good financial decision, and whether or not someone is trustworthy are examples of decisions being made on emotions above anything else. The reason only helps a little.

We find an idea “pleasant” or “threatening” and declare it true or false. Reason only later appears to support this finding, rarely to challenge it.

Dogecoin founder Jackson Palmer, for example, recently said that the cryptocurrency is a “get-rich-quick cult designed to extract money from the desperate and naive while increasing the wealth of its proponents.” But this does not deter those who are determined to gamble their future with him.

Almost universally, regardless of income level or education, people suffer from the same money woe, but the real issue isn’t money at all.

Sam Instone, AES

These speculators tend to be the same people who ignore decades of peer-reviewed academic evidence on the sensible way to invest your money and “get rich slowly.”

This is not bad, it is actually the essence of being human.

Perhaps it is not surprising then that, in a noisy world where contradictory information abounds, we become “predictably irrational.” After all, we are all trying to find clarity around our decisions and feelings of greed, anxiety, worry, denial, shame, inaction, and fear.

Almost universally, regardless of income level or education, people suffer from the same money woe, but the real problem is not money at all.

The real problem is the emotional relationship that people have with their money..

Consider these examples of mindset “scripts”: “It’s no good talking about money,” “I left it too late to start and I’ll never have enough money to be sure,” “I deserve to spend money,” “Cash in the bank is my money.” safest option, investing is for the rich”, and “If you are good, the universe will give you what you need”.

Sound familiar to you? These beliefs are rooted in his childhood experiences, the community in which he grew up, and the habits of those around him.

“We have these beliefs rolling around in our heads, and for many of us, they have been passed down to us from our parents,” says Dr. Brad Klontz, a financial psychologist and associate professor at Creighton University in the US.

They are often only partial truths, in much of our upbringing and we, in turn, pass them on to our children.

Knowingly or unknowingly, these “scripts” are responsible for your financial decisions.

Perhaps the biggest shield against poor financial decision making is an increased self-awareness around these scripts. Knowing yourself better is the best starting point for change.

Researchers have identified four common attitudes toward money: the cult of money; money evasion; Surveillance of money and status of money.

Do you think that money can solve all your problems? You could be a “money worshiper”. Do you worry about money even though you have a stable income and a healthy retirement fund? You may be “attentive to money”.

Recognizing your own financial personality or working with a professional who understands your scripts is the first step to making better financial decisions.

Knowing your drivers can help you achieve smarter financial goals, whether that’s spending less on impulse buys, investing wisely (avoiding speculation), or saving more for retirement, experts say.

In my next column, I’ll explore each of these money archetypes, along with how to discover which one applies to you and the insights and advantages they can bring to you and your family.

But for today, hopefully we can agree that personal finance is more personal than financial.

Sam Instone is co-CEO of wealth management firm AES.

Updated: July 30, 2021, 4:00 am

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