Very early in the career of a financial adviser, he or she is faced with a situation in which a client is clearly acting outside of the client’s best financial interests, and is either unable or unwilling to change. This could include overspending, under-saving, buying high and selling low, or not following through on financial planning advice. Often the adviser gives sound suggestions but the client will not act on them. Financial psychology can help advisers understand their clients’ beliefs and behaviors and equip advisers with tools and techniques to help.
Behavioral finance is an emerging field that seeks to apply more than 100 years of psychological science around how humans think and behave to help make sense of what seems to be universal, self-destructive financial behavior patterns. Financial psychology incorporates this knowledge of normal human cognition and emotion into an individual’s unique life experiences and money beliefs and how they influence their re