Human Capital: Exploring the Intersection of Psychology and Finance – Morningstar


Here’s how psychological factors shape financial management.
In theory, personal money management is simple: Spend less than you earn and invest the rest in a few well-diversified funds. Keep this up consistently for about 30 years, and you can spend the rest of your life living comfortably on the proceeds.
In practice, things aren’t so straightforward.
In this column, I hope to bring awareness to the myriad ways that psychology and emotion affect our financial decisions for good or ill. We’ll explore psychological factors that contribute to many aspects of financial management from goal setting to estate planning.
Here’s a preview of some of the topics we’ll navigate together.
For many, earning enough to support regular savings requires an initial investment of several years and tens of thousands of dollars to increase their earning power. If this can be managed at all, it sets the timeline back considerably. Still, it’s often worth the detour, since without skilled labor, people are vulnerable to poverty traps and financial chaos, making long-term investment nothing more than a pipe dream.
Once people start earning, lifestyle creep (fed by expectations of family, friends, culture, and desire) creates new challenges. Some fall into debt traps that set them back years if not decades. Others may not understand the importance of investing early and thus wait too long to begin accumulating assets. Some become sandwiched between the needs of their children and the needs of financially vulnerable parents, leaving little for personal savings. All these things eat away at one’s ability to build wealth.
Those who manage to save and invest can still fall prey to all kinds of mistakes owing to unconscious biases, lack of knowledge, overconfidence, and faulty rules of thumb. And, with thousands of investment products to choose from, they may get stuck in analysis paralysis because of what Christine Benz aptly calls the ”financial complexity complex.”
Then, after decades of saving and investment, many of those who reach financial freedom find it difficult to enjoy the fruits of their labor. It can be hard to shift from the mindset of disciplined saving to one of comfort, plenty, and freedom to spend, and the resulting anxiety eats away at one’s quality of life.
Those fortunate few who manage to cultivate intergenerational wealth must then confront the challenges of family dynamics and clashes of culture in the process of family governance and estate planning.
Even if someone manages to avoid all these pitfalls, they will be faced with the reality of cognitive decline, deteriorating health, and a waning ability to manage their own affairs as they approach the end of life, limiting or even eliminating one’s sense of financial autonomy.
And this is if you make the journey alone! If you share finances with others, there is the potential for conflicting priorities and values, challenges in communication, and mismatched timelines at every step along the way.
Clearly, personal financial management involves much more than numeracy and financial acumen.
Every major financial event is also a major psychological event, sometimes involving or affecting others. Career moves, marriage, divorce, parenting, education, home ownership, starting or selling a business, receiving an inheritance, and so on, all have deep emotional and psychological importance in our lives, making it extremely difficult—I would even argue inadvisable—to remove emotion from our mental calculus.
Add to this the fact that we are all human and have human limitations. Most of us will face some sort of psychological challenge to saving and investing. Short-term thinking, emotional spending, financial caretaking of able others, gambling, and financial avoidance are just a few of the ways that we can get in our own way. Yet, if we dare admit to these realities, we are often faced with shame rather than support or helpful advice. I aim to change that.
If you are a purely logical decision-maker who has no difficulty saving, investing, and building wealth, I congratulate you. You do not need this column. But if you are not a perfect money manager, if you struggle to save or invest, if you need to curb your emotional spending or finally have that hard money talk with your spouse, you are in the right place.
Overspenders? I see you. Hoarders and penny-pinchers? I hear you. Worried wealthy? You are welcome here. Our goal is not to remove our humanity from the process of financial decision-making, but to explore and understand the nonmonetary aspects of these decisions so that we can make choices that truly support us in the pursuit of prosperity and well-being.
As we take this journey together, I hope to hear from you about topics that interest you. What aspects of financial decision-making do you want to learn more about? What areas of financial psychology can I explore for you? I welcome your suggestions and questions. I can be reached at [email protected]
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.
© Copyright 2022 Morningstar, Inc. All rights reserved. Dow Jones Industrial Average, S&P 500, Nasdaq, and Morningstar Index (Market Barometer) quotes are real-time.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.


🤞 Don’t miss these tips!

We don’t spam! Read more in our [link]privacy policy[/link]


Don’t miss these tips!

We don’t spam! Read our [link]privacy policy[/link] for more info.

    Leave a comment
    Your email address will not be published. Required fields are marked *

    This site uses Akismet to reduce spam. Learn how your comment data is processed.

    Hemant Malhotra
    Shadow Banking - Meaning, Functions, Advantages & Disadvantages
    January 11, 2021
    Shadow Banking - Meaning, Functions, Advantages & Disadvantages
    Siddhi Rajput
    Online Banking
    December 24, 2021
    Online Banking
    Hemant Malhotra
    5 Common Credit Card Problems & How To Fix Them
    January 19, 2021
    5 Common Credit Card Problems & How To Fix Them
    Sponsored Pix
    Subscribe to Our Newsletter

    Don’t miss these tips!

    We don’t spam! Read our [link]privacy policy[/link] for more info.