In chapter 1 of Morgan Housel’s “Psychology of Money,” he addresses how personal experiences shape financial behavior and can explain why people come to vastly different conclusions about how to handle their finances.
Money is a topic that elicits a wide range of emotions and reactions from people. From excitement to anxiety, our relationship with money is deeply influenced by our unique experiences and upbringing. Housel argues that what we have experienced firsthand often holds more weight in shaping our thoughts and actions than what we've learned from textbooks or second-hand sources.
Historical Context and Financial Behavior
Examining macro events over the past few decades can offer insights into how historical context shapes individual financial behavior. In their 2006 study, economists Ulrike Malmendier and Stefan Nagel explored how individuals' experiences during formative years impact their financial choices later in life. They found compelling evidence that personal history plays a pivotal role in shaping investors' willingness to take on risk.
For instance, individuals who came of age during periods of high inflation were less likely to invest in bonds later in life compared to those who experienced low inflation. Similarly, those who witnessed a strong stock market during their formative years tended to allocate more of their portfolio to stocks.
Emotional Scars and Financial Attitudes
Housel points out that the emotional scars left by significant historical events, such as the Great Depression, can have a lasting impact on financial attitudes and behaviors. While we may read about the hardships endured by previous generations, we cannot fully comprehend the depth of their experiences unless we lived through them ourselves. This disconnect can lead to starkly different perspectives on financial risk and investment strategies.
As investor Michael Batnick aptly puts it, "Some lessons have to be experienced before they can be understood." No amount of spreadsheet analysis can capture the visceral fear of coming home to uncertainty about your financial future and its implications for your loved ones.
Reflecting on Personal Financial Influences
So, why does understanding this matter? Reflecting on the factors that have influenced your financial thoughts and decisions allows us to assess whether they are serving us positively or negatively. Are your attitudes toward money rooted in fear or optimism? Do you need to readjust your beliefs and behaviors to align with your long-term financial goals?
By acknowledging the role of personal experience in shaping our financial mindset, we can take proactive steps to reevaluate and potentially realign our approach to money management.
Reflect on your life and consider what events or circumstances left the biggest impact on you regarding finances. Were your parents penny pinchers, or did they take on large sums of debt? Did you rarely go on a vacation, or did you go often to exclusive places? Did you start understanding money during significant macro events like hyperinflation in the 1970s and 1980s? Did you start investing in stocks during the tech boom of the late 90s only to see it come crashing down? Did you invest in real estate right before the crash of 2008? If so, how are those experiences shaping how you handle your money now and what you believe in? Have these experiences helped you make better financial decisions, or have they created financial biases or anxiety?
Connecting Past Experiences to Current Decisions
Being realistic about this and connecting point A, the experience, with point B, how you currently make decisions, can help you understand if what you are doing is the right way to handle your finances or if it is simply based on a very impactful experience in the past, that may or may not be influencing your decisions in the proper way today.
If you feel like your past experiences are impacting your decisions today and want to talk through this, please reach out. I’m sure we’ve worked with many people who have gone through similar experiences.
Provista Wealth Advisors in Greenville, SC, provides peace of mind through personalized asset management, expert estate planning, and retirement planning. Navigate your financial journey with confidence. Rest Assured, We Have A Plan. Give us a call at (864) 696-2410 or send us a message to schedule your free introduction meeting.