Sunday, October 21, 2007

Psychology of Personal Finance

Investopedia has an interesting article on Behavioral Finance. While much of the article discusses behaviors particular to investors such as herd behavior, there are behaviors which can effect anyone's finances.

One behavior is mental accounting. This is treating money differently. "Found money" such as an income tax return can be splurged while money that was earned is more valuable.

Prospect theory is how we react to certain events, treating negative events as more significant than positive ones. For example, someone who gains $100 and then loses $50 is unhappy while someone who only gained $50 is happy, even though they're even in terms of results.

Check out the behavioral finance article and see if any of its concepts apply to you.


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Grace said...
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