As the markets roil and uncertainty hangs over the economy in ways we haven't seen since 2008, it's a good time to address how all the turbulence has impacted investors' psyches. Money and psychology are inextricably linked, of course -- it's the reason people often call the markets "skittish" to explain drops with little cause. And fear and panic are the main emotions that drive investor selling, almost always irrationally (see yesterday's 391-point drop in the Dow as an example).
But what most investors don't realize is that in addition to collective market psychology, almost everyone has his or her own individual psychological issues with money. While crashing stocks, ballooning mortgage payments, or the threat of job loss are understandable causes of stress, our more significant problems with money stem from our own internal issues that drive many people to act irrationally when it comes to financial matters -- whether there's a market crisis or not.
The most obvious examples of these issues are the classic money-related pathologies we're all familiar with: gambling addiction, overspending, hoarding, etc. But there are many more subtle everyday examples -- the inability to deal with day to day financial tasks, falling for get rich quick schemes, taking on excessive debt, and the inability to attend to important long-term financial issues like estate planning.
Irrationality with money plays a big role in families, too: the myriad subtle and unintended messages parents give to children regarding money, or relationship problems that can arise over insignificant amounts of money. In a significant number of divorces money is a central issue, and many problems with settling a divorce amicably are money related.
Interestingly, irrationality with money is also evident on a national level, as evidenced by the ongoing financial crisis, during which many of our largest financial institutions and regulatory agencies made decisions that, in hindsight, were clearly problematic and avoidable.
So if it's true that we all have money issues, how do we correct them? The first step is to identify what money means to you—what it really means to you.
According to Webster's, money is:
1: something generally accepted as a medium of exchange, a measure of value, or a means of payment: as a: officially coined or stamped metal currency
2: wealth reckoned in terms of money b: an amount of money
3: a form or denomination of coin or paper
But this definition, while accurate, doesn't quite get at what money actually means to many people. An easy way to begin to understand your own relationship with money is to answer the following question:
money = (fill in the blank)
When I've posed this question to workshop participants, they've been amazed at how large and varied a list they create. Some of the most common answers are: control, love, power, security, safety, independence, freedom, social acceptance, and sexual appeal. Another easy test is to identify how money is being used, and you'll have a sense of what it means. For example, money can be used to show love, to punish, to foster dependence, to manipulate, to humiliate, and to create alliances.
