The Powerful Effects of Our Beliefs and Biases

Money. Most of us spend a good portion of our lives pursuing it - whether directly through our careers or indirectly through investments, side jobs, or entrepreneurial ventures. So, money plays a significant role in almost everyone's life - in fact, a lack of it often leads to stress and anxiety, and some studies have even shown that financial stress lowers your IQ.

Yet, while money plays a significant role in our lives, we rarely stop to examine our fundamental beliefs about it. How often do we question the unconscious biases that shape our spending, saving, and investing decisions? And if we did, what would it change?

Money and Psychology

One of the most striking findings in social psychology is the effect of "money primes" on human behavior. In a notable study led by psychologist Kathleen Vohs at the University of Minnesota, participants who were subtly reminded of money (for example, by seeing images of currency or word puzzles involving money) demonstrated shifts in behavior. They worked harder on tasks and showed greater self-reliance but became less helpful toward others. This finding is consistent with other research suggesting that overemphasizing material gain can correlate with lower satisfaction with interpersonal relationships.

What does this all mean for you and me? Even a subtle reminder of money can trigger significant behavioral changes. Now imagine how powerful our entrenched, long-held beliefs about money must be. If we unknowingly carry biases - such as "more money equals more happiness" or "money is the root of all evil" - these attitudes can directly influence how we approach everything from daily spending decisions to major life choices like buying a home or negotiating a raise.

The Limitations of Behavioral Economics

This week's theme on the psychology of money pulls heavily from research in behavioral economics - a field that uses psychology to understand people's relationships with money. It is also important to note that psychology in general has been undergoing what many call a "replication crisis," where some famous studies have not been replicated as robustly as initially hoped. While the broad takeaway - that money holds potent sway over human thought and behavior - remains widely accepted, it's always wise to consider these topics with a grain of salt.

The bottom line, however, is that money can alter attitudes, motivations, and interpersonal behaviors - it's the degree of impact that's debatable. Ongoing research continues to refine our understanding of why this effect is so strong.

How Beliefs and Biases Form

Our financial beliefs often form in childhood and are influenced by our families, communities, and broader cultural messages. If you grew up in a household that experienced scarcity, you might develop a "scarcity mindset," feeling you must hoard resources. Alternatively, if you grew up with parents who spent freely, you might adopt a more cavalier stance toward credit card debt and saving for the future.

These formative experiences don't just vanish when we become adults; they transform into unconscious scripts that guide us. For example:

• Belief: "Spending money on myself is selfish."
• Potential Outcome: You may neglect self-care or professional development, limiting long-term opportunities.
• Belief: "Only flashy items show success."
• Potential Outcome: You might funnel money into conspicuous consumption, hampering your ability to invest in retirement.

Remember, your past experiences don't determine your current beliefs with absolute certainty, but it's fair to say they do play an important role. And sometimes that role can be oppositional, leading to behaviors that are the opposite of what you experienced (for example, if your parents were always in debt, you may want to avoid debt altogether).

Common Biases at Play

As we'll learn, several well-studied cognitive biases come into play in money matters:

• Confirmation Bias - Seeking out information that aligns with existing beliefs, such as reading only articles that confirm your suspicion that "stocks are too risky," can lead to missed investment opportunities.
• Availability Heuristic - Overestimating the importance of recent or dramatic events - like a market crash - could cause panic selling, even when history shows markets often rebound over time.
• Loss Aversion - We feel the pain of losses more acutely than the pleasure of equivalent gains, potentially leading to overly cautious investing or refusing to sell losing assets when it might be best to cut our losses.

We'll explore these and other topics in this week's theme.

Why It Matters

If a fleeting reminder of money can alter our willingness to help someone or childhood experiences can guide life-long attitudes about our financial lives, it's clear that these entrenched (and potentially misguided) beliefs have the potential to shape the trajectory of our entire financial life. We may even risk making costly mistakes - like racking up high-interest debt or passing up investment opportunities - simply because our internal "money scripts" lead us astray.

By examining and, if necessary, challenging our beliefs, we gain a critical measure of financial self-awareness into why we may make certain financial decisions. Money may be powerful, but our willingness to question our assumptions can keep it from dictating choices that ultimately conflict with our goals and values.

Let's get started!