Money psychology is very hot right now within the financial advisory business. There are plenty of books and podcasts addressing the topic. In fact, the CFP Board just added a new category titled “Psychology of Financial Planning” to the Certified Financial Planner Examination. But we never hear about the Sociology of Money.
I wholeheartedly believe that psychology is integral to how we manage our money. Financial Planning is not just taking in the facts and producing a plan of action. There is also an emotional component. See my blog from last week for additional thoughts on the psychology of financial decisions.
Finance as a Social Science
Economics is a social science, rather than a hard science, because it relies upon the human factor. Humans are unpredictable and our behavior does not follow natural laws. In personal finance we must consider both the psychology of the market (will that stock go down?) and the psychology of the individual (will that person sell if their stock price drops?).
Creating a financial plan involves considering the goals and values of the individual clients. Additionally, implementation is a vital step of the financial planning process. You can have the most brilliant plan in the world but if you don’t follow it then it is worthless. In order to prepare a plan that an individual will actually follow it requires an understanding of how the person views and interacts with money.
I recently finished reading Morgan Housel’s “The Psychology of Money.” It was a phenomenal read and I highly recommend it to anyone interested in the topic. (It is a book written for investors, not advisors, and so is relatively easy to digest.) We should all understand more about how we think about, feel about, and interact with money. This knowledge allows us to catch ourselves when we are acting against our own best interest. It enables us to make plans for our money that we can comfortably follow.
The Sociology of Money
While considering the topic of money psychology, I had the realization that what is still missing from the conversation around finance is the sociology of money. We don’t all have the same feelings around money because we all have different views and lived experiences. Similarity, our interactions with money are directly related to our societal experiences.
There are cultural difference, class differences, and racial differences at play. A rich white male, a poor Latina, and a middle-class black non-binary individual all have different realities surrounding money. These differences influence our monetary decisions and actions.
Psychology focuses upon the individual while sociology focuses upon systems of people. Often we look at people and money through a psychological lens and believe that they have mindset issues. If they could change their feelings, then they could change their circumstances. For example, a person engaging in retail therapy could save money by finding a less expensive way to approach their problems or anxieties. (I would argue it is way more complicated than this, but I imagine you have heard similar assertions).
Societal Influences on Personal Money Stories
What is being overlooked is that so many of the money issues are not individual, they are societal. People from marginalized groups do not have the same lived experiences or opportunities as those with dominant identities.
Consider the topic mortgages. Statistics show that black and Latino people on average are charged higher interest rates on their mortgage than are white people. This is not something that a person of color can overcome with therapy or self reflection. Black and Latino people will not be able to obtain the same level equity in their homes as white people until the system changes and begins equitably issuing mortgages.
Another example of this is the generational transfer of wealth. Data shows us that inherited wealth contributes substantially to the disproportionate poverty in BIPOC communities. Yet, financial planning and investment advice is generally approached as a monolith in which race is not discussed.
Same sex couples, who are only recently able to legally marry, will be in a different situation than heterosexual couples who married a decade earlier. Families who traditionally live in multi-generational households will need to consider their finances differently than those who live independently and do not intermingle their wealth. These are just a few instances of the sociological influences of Money.
Reject the Capitalist Messaging
So many of our financial influences are sociological in nature. Yet, the majority of the articles, resources, and advice we encounter is address to middle class whites. A greater emphasis upon the impact of the sociology of money is needed.
Living in a patriarchal, capitalist society the focus is generally on what people can do to improve their personal financial outcome. This rugged individualism permeates all aspects of society, but it is especially notable in the area of money. Rather than buying into the idea that money is wholly personal, we need to acknowledge the societal impact on people’s financial situations. This teaching should be incorporated into the training of financial advisors in the same way that money psychology is now being integrated.
Maura Madden is a registered investment adviser in the State of Washington. The Adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.