Financial Psychology Overview: Among the academic majors that can be useful for financial careers is psychology. Representative issues and applications of psychology in finance have been divided into these three groupings:
- Applications in Career Management
- Understanding Client Attitudes
- Financial Fraud
Note that there is a great deal of overlap among the groupings.
Applications in Career Management
Financial Independence: How achieving and advertising it can enhance career development.
The Psychology of Power: Dealing with powerful people who expect to be above the law.
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.
Organizational Psychoanalysis: How psychiatrists and psychoanalysts can help in identifying dysfunctional group behaviors and suggesting remedies.
Point of View: Being able to see the world through another person's point of view is a vital skill for forging personal bonds and building influence. However, according to Stanford Business School professor Jeffrey Pfeffer ("The narcissistic world of the MBA student," Financial Times, 11/8/2010), our present day educational system, all the way through graduate schools, breeds self-centered and self-important attitudes.
Self-Awareness: In many cases, disagreeable conduct and interpersonal conflict is caused by a lack of self-awareness on the part of some people. Stanford University management and engineering professor Robert Sutton ("How to cope with difficult colleagues," Financial Times, 11/8/2010) advises that sometimes it is merely sufficient to advise such people that they are being unpleasant. Sutton recommends strongly that, in such cases, you cite very specific examples of improper conduct. To regulate your own conduct, the ability to assume another's point of view (see above) 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. See "It's obvious that being happy is a serious handicap," a commentary by Lucy Kellaway in the 11/8/2010 Financial Times.
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. See "The power of posture," The Economist, 1/15/2011.
Understanding Client Attitudes
Crafting Messages: A key aspect of marketing and advertising is crafting messages that will resonate with clients and the general public. The book Words That Work covers this area in detail. For people in public relations functions, understanding investor, client and public psychology can be very helpful.
Fluency: A common application is developing catchy acronyms for complex products.
Influencing Behavior: Especially for those in marketing and product management, common methods used to influence client or customer behavior are:
Messages are crafted and catchy acronyms are created (see the two previous headings) typically with the intent of influencing client behavior.
The Generation Gap: Many financial advisors and financial planners are young people in their 20s who serve, or 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.
Young people in 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.
Hyperopia: How overestimating future rewards can lead to suboptimal decisions about saving and investing.
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. Source: "Memory gaps," FT Wealth magazine, Spring 2010 (supplement to the 3/26/2010 Financial Times).
Risk aversion: Understanding clients' attitudes toward risk is important for many financial professionals. Since risk aversion can be related to generational issues, a related matter is the generation gap (see above).
