Finance and psychology are two fields which may appear miles apart from each other but when you look closely you will find an interesting relationship between finance and psychology. Finance refers to a study of various topics related to money like banking, stocks, mutual funds, balance sheets and financial statements of the company while psychology refers to that science by which human behavior and mind is studied so as to know reasons behind particular actions of an individual under given circumstances. Let’s look at the relationship between finance and psychology in detail
When one looks at it from the finance point of view, psychology plays a major role when it comes to taking various decisions about money and that is the reason why in case of financial markets like stock market, commodity market etc., there are periods where price do not follow rationality as due to irrational behavior of traders and investors prices rise and fall beyond fair value of the stock or commodity. In simple words, it is due to psychology factor that people in financial markets behave irrationally. Besides if two people are looking at the same financial statements of the company than both of them will interpret in different ways, so for example if cash in hand of a company is excess than one individual will treat it as good sign due to liquidity factor while another individual will treat it is a bad sign citing lack of growth opportunities for the company so as to invest that idle cash.
When on look at it from psychology point of view, finance has a major role in the development of the psyche of an individual because while money cannot purchase everything but it can purchase 99 percent of things or luxuries of the life and that is the reason why money or finance plays an important role in shaping the psychology of an individual as people having money and other things remaining the same feel more confident and secure as compared to those people who do not have money. Besides having sound financial knowledge also helps an individual in achieving psychological satisfaction because history is filled with examples where millionaires have become bankrupt due to no financial discipline and knowledge. Hence in simple words finance in a way increases the confidence and improve the mindset of an individual which in turn helps an individual immensely.
As one can see from the above that finance and psychology have an interesting and important relationship and that is the reason why individuals studying finance or psychology should not ignore this relationship rather they should have knowledge about both the subjects in order to have complete knowledge about their respective subjects.