PSYCHOLOGY

OF MONEY

REPORT BY
SIDDHARTH.P
XII
 Psychology of money

INTRODUCTION :

WHAT IS MONEY ?

 Money is a medium of exchange; it allows people to obtain what they

need to live.Money makes the world go around. Economies rely on the
exchange of money for products and services. Economists define money,
where it comes from, and what it's worth.

 Like gold and other precious metals, money has worth because for most
people it represents something valuable.

 Fiat money is government-issued currency that is not backed by a

physical commodity but by the stability of the issuing government.

 Above all, a money is a unit of account - a socially accepted standard unit

with which things are priced.

Why is money very important?

 Money gives you freedom and choices. You can decide where and how you
want to live when you have a good income or financial resources. On the other
hand, when you do not have much money, choice may be something that you
cannot afford. The choices available to you may not really be choices at all.

Obviously, you need money to cover your basic expenses: food and shelter.
Beyond that, how much money you need will be determined by what kind of
life you want for yourself. Most people want a middle class lifestyle. What it
means to be middle class varies from source to source though. The general
consensus is that those in the middle class typically have adequate access to
education as well as goods and services. Also, those in the middle class
generally can afford to own property and have a fair amount of discretionary
income. That is, they have disposable income or money that is not allocated
solely to satisfying basic needs.

So, how do you get money? The best way to achieve your financial and lifestyle
goals is to prepare yourself for a good career. And, the best way to do that, in
general, is to get a good education. Data shows that college-educated people
earn almost twice as much as those without a degree. Your decision about what
career path to take should not be solely driven by money, however. Ideally, your
career should involve work you find interesting and which you can identify
with. Working just for a paycheck is to have a job, not a career.

WHAT DO WE KNOW ABOUT MONEY?

No one is entirely rational when it comes to money. We don’t create and

follow a budget or save something every paycheck though we believe it
would be in our best interest. We know we need a financial plan but put off
the work involved; somehow it never happens. We spend too much out of
recklessness or exuberance, or too little out of guilt. Our money behavior
often causes shame.

It’s worth thinking about money as something with which you have a
complex relationship. Your money (and more broadly your personal
finances) is not a fixed entity, but rather a complex of data points, challenges
and opportunities you circle around, interact with and have feelings about.
You make decisions about money that impact your financial situation and
these impacts in turn reciprocally affect your feelings and future behaviors.
And it’s a relationship that evolves over a lifetime.

Here are three key things to know about the psychology behind our personal
relationships with  money:

 Emotion plays a huge role.

 Anxiety and avoidance create a vicious cycle.

 Psychologically, you can’t entirely escape your family and your past.

“But more important is that as much as we recognize the role of luck in

success, the role of risk means we should forgive ourselves and leave
room for understanding when judging failures.”-Morgan housel
Luck and risk
It’s easy to convince yourself that your financial outcomes are determined
entirely by the quality of your decisions and actions, but that’s not always
the case. You can make good decisions that lead to poor financial
outcomes. And you can make bad decisions that lead to good financial
outcomes. You have to account for the role of luck and risk.

To mitigate the risk of overweighting the role of individual effort in

determining outcomes:
1. Be cautious about the people who you admire and look down upon.
Those at the top may have been the benefactors of luck while those at
the bottom may have been the victims of risk.
2. Focus less on individuals, and turn your mind to broader patterns. It’s
difficult to replicate the outcomes of successful individuals, but you
may be able to participate in broader patterns.

BEING RICH VS WEALTHY:

People buy mansions and fancy cars because they want respect and
admiration from others. What they don’t realize is that people don’t
admire the person with the fancy house or car; they admire the object and
think of themselves having that object. So buying impressive items to gain
admiration and respect from others is a fool’s pursuit – these things can
not be bought. If you’re rich, you have a high current income. But being
wealthy is something different – wealth is not visible. It’s the money that
you have that’s not spent. It’s the optionality to buy or do something at a
future time.
Being rich offers you opportunities in the short-term, but being wealthy
provides you the flexibility of having more of the items you want –
freedom, time, possessions – in the future.
Cash is not the enemy
“A plan is only useful if it can survive reality. And a future filled with
unknowns is everyone’s reality”
If you’re relatively young and earn more than you spend, the best way to
optimize your long-term investment returns is to invest the majority of
your money into a diversified portfolio of low-cost index funds. Holding
more than a few percentage points of your net worth in cash is silly
because the value of cash erodes with inflation, and that cash can
otherwise be put into assets like stocks that historically have compounded
at a rate of 6-7%.

While it’s an alluring prospect to invest in ways that maximize your

returns, these theories often don’t account for you psychology. Imagine
you’re 95% invested in stocks and have 5% in cash. The market declines
20-25%. Depending on how that crash affects your psychology, having
such a small percentage in cash may make you more likely to panic sell
some of your stocks during that downturn. And that panic sell may lead to
you missing out on far more returns than if you had held a larger
percentage of your portfolio in cash and didn’t sell because you felt more
secure.

The difficulty of long-term financial

planning
As humans, we tend to underestimate how much our personality and goals
will change with time. This makes long-term financial planning hard. We
may think we’ll never have kids or a big house when we’re young, so we
plan as if that’s the case, but then we find ourselves with a house and kids
that the plan didn’t account for. So when thinking about your investment
strategy, try to account for the unknown.
HOW MONEY MAKES US FEEL

The researchers found that being exposed to money led to big changes
in people's actions. Those who had money on their minds were less
inclined to help someone in need and more inclined to work alone
than interact with others. And they tended to work longer on
challenging tasks without asking for help.

The bottom line: money appears to have both positive and negative
effects on our behavior. On the one hand, it encourages self-
sufficiency and hard work; but on the other, it discourages some
positive social interaction.

Although it may seem from this study that money makes people
greedy or selfish, the authors say this isn't necessarily the case. "A
selfish person likely would have immediately asked for help when
given a tough assignment ... and would have rejected the notion of
accepting more work than was necessary," they write in the June issue
of Current Directions in Psychological Science.

MY REFLECTION ON THE TOPIC

In my point of view money has got positive and negative impacts.but it has
more positive aspects than we ever could see. I  found that being exposed to
money led to big changes in people's actions. Thus Most, if not all, people
would love to have a large amount of money dropped into their hands. They say
this because they feel that money can solve almost all their problems and
worries. However, while it may be true that having money can take care of your
basic needs like food and a place to stay, having too much money is bad for
your body and your soul who had money on their minds were less inclined to
help someone in need and more.
Conclusion
the reason money is so important is that it provides options for us to live a better
life that you choose and puts you in control. Having money and being
comfortable with finances also gives you freedom and options to decide how
you want to live and support the things you care most about in your life We tend
to seek money and power in our pursuit of success (and who doesn’t want to be
successful, after all?), but it may be getting in the way of the things that really
matter: happiness and love. How does money affect quality of life?Recent
experiences has shown me that however, suggests that quality of life isn't that
great for the richest of the rich, either. However, people who accrue wealth and
pull in a large income tend to report lower emotional well-being and daily
happiness than people who earn less money.

ABOUT THE PODCAST AND BOOK

Timeless lessons on wealth, greed, and happiness doing well with money isn’t
necessarily about what you know. It’s about how you behave. And behavior is
hard to teach, even to really smart people. How to manage money, invest it, and
make business decisions are typically considered to involve a lot of
mathematical calculations, where data and formulae tell us exactly what to do.
But in the real world, people don’t make financial decisions on a spreadsheet.
They make them at the dinner table, or in a meeting room, where personal
history, your unique view of the world, ego, pride, marketing, and odd
incentives are scrambled together. In the psychology of money, the author
shares 19 short stories exploring the strange ways people think about money and
teaches you how to make better sense of one of life’s most important matters.

BIBLIOGRAPHY;

Podcast: psychology of money by morgan houstel

https://www.youtube.com/watch?v=b6lTfy1VwG

https://www.cbsnews.com/news/study-money-affects-human-interaction/M

https://en.wikipedia.org/wiki/Money
https://www.audible.in/pd/The-Psychology-of-Money-Audiobook/
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