Applying Psychology to Finance

Psychology can offer insights to financial professionals in dealing with people.
Jose Luis Pelaez Inc/Blend Images/Getty Images

Overview: Applying psychology to finance can be extremely useful in many situations. As a result, psychology is an academic major that, surprisingly or not, can be quite germane to the field. However, do not jump to the conclusion that your psychology degree automatically will open doors in financial services firms. Instead, if you have a background in this field, consider using it in marketing yourself to potential employers, to tout your qualifications for particular lines of work.

Some representative issues and applications of psychology to jobs in finance follow, with links to in-depth articles on these subjects. If there is an underlying theme, it is that understanding client attitudes can be greatly enhanced by at least some knowledge of psychology.

Crafting Messages, Slogans and Product Names: A key aspect of marketing and advertising is crafting messages that will resonate with clients and the general public. The book  covers this area in detail. For people in public relations functions, understanding investor, client and public psychology can be very helpful. Meanwhile, the concept of fluency is frequently applied in developing catchy acronyms for complex products.

Influencing Behavior: Especially for professionals in marketing and product management positions, common methods used to influence client or customer behavior include anchoring and nudging. These concepts also have applications in developing messages and product names that influence client behavior.

The Generation Gap: Many financial advisors and financial planners start out as young people in their 20s or 30s who serve, or at least try to attract, much older clients. Meanwhile, many clients are reluctant to rely upon much younger people for critical advice. This problem is not unique to financial services.

Doctors, dentists and lawyers face the same problem as young practitioners. One can learn equally valuable lessons from them, and young people in all these fields must be very sensitive to this issue. Work extra hard to establish credibility with, and gain the confidence of, older clients and prospects. Pay as much attention to establishing personal rapport and trust with older clients and prospects, as to purely technical details. Be especially careful about appearance, dress, mannerisms, tone of voice and the like.

Crowd Psychology: The securities markets reflect extreme swings in public mood, from exuberant to despairing. Many financial services firms themselves are manic/depressive, hiring recklessly in up markets and ruthlessly firing in downturns. Responding to such irrational behavior is important for marketing and market research professionals. The classic book A Random Walk Down Wall Street discusses investor sentiment from a historical and economic perspective. Also, many classic financial frauds exploit crowd psychology to varying degrees.

Learning From the Past: People tend to block bad memories with good ones, such as remembering gains while forgetting losses. Thus cycles of boom and bust may be an inevitable result of how the human psyche works.

Additionally, people under stress (such as financial professionals like traders) tend to have impaired long term memory, forgetting previous market disasters and repeating destructive behaviors.

Risk Aversion: Understanding clients' attitudes toward risk is important for many financial professionals. Additionally, since risk aversion often is influenced by past experiences, especially the state of the country and the world during the periods of one's youth, appreciating clients' backgrounds and frames of reference can be key to serving them effectively. For example, people who grew up in times of economic recession or depression often tend to be excessively risk averse. Meanwhile, people who grew up in prosperous times and well-to-do homes may exhibit an opposite tendency, called hyperopia.

This is an over-estimation of future rewards and returns, a manifestation of extreme optimism.

Psychology in Career Management: At the same time, a grasp of basic concepts in psychology can be quite useful in personal career management. For example, in our discussion of the importance of achieving financial independence, describe how achieving and advertising it can help you advance professionally. As another example, understanding the psychology of power can be critical in dealing effectively with people who do not feel bound by normal rules of conduct. Some of these represent genuine psychopaths on Wall Street. There even is something that has been dubbed organizational psychoanalysis, wherein psychiatrists and psychoanalysts identify dysfunctional group behaviors and suggest remedies.

Decisions Under Stress: Under stress, people often become more intuitive and less analytical. In particular, financial advisors and securities traders often must make quick decisions under uncertainty with huge sums of money at stake. Inexperienced employees often do not have good intuitions. Experienced employees may have formed their intuitions under market and economic conditions that do not reflect the current environment.

Point of View and Self-Awareness: Being able to see the world through another person's point of view is a vital skill for forging personal bonds and building influence. Unfortunately, many critics find that our present day educational system, all the way through graduate schools, breeds self-centered and self-important attitudes. Meanwhile, disagreeable conduct and interpersonal conflict often are caused by a lack of self-awareness on the part of some people. Sometimes it is merely sufficient to advise such people that they are being unpleasant. In such cases, you might try to cite very specific examples of improper conduct. To regulate your own conduct, the ability to assume another's point of view is a critical attribute.

Satisfaction: High achievers are often driven by dissatisfaction with their circumstances or personal flaws, often with a desire to prove naysayers or critics wrong. On the other hand, people who are too satisfied and happy frequently lack the drive to achieve.

Posture: Physical posture can influence not only on how others react to you, but also how you feel and act. In particular, maintaining an expansive posture (standing or sitting upright, holding arms outward, legs spread, etc.) not only increases the chance that you will be seen as a leader, but that you will act as one.

Find Your Next Job

Job Search by