People often talk about emotions and money in vague terms. Improve your money mindset! Overcome limiting money beliefs! Rewrite your money rules! It always sounds, to me, like aspirational chants that should go on a mood board.
But money and emotions are so much more than platitudes you’d hear on a wellness retreat. The topic is closer to financial psychology or behavioral finance, and our relationship with money can ripple into many areas of our life outside of financial decision making.
The problem is there’s soooooo much to discuss that it’s hard for one piece to cover everything, in depth, at once. That’s why I’ll give a high-level overview of many topics so you can feel ready for future deep dives.
To understand money and emotions, it’s helpful to visualize the topic like an iceberg.
The tip of the iceberg
We can actually see this portion, which is the best way to describe direct connections between emotions and money. Below are some examples, which get progressively deeper as we go.
1. Emotions are helpful money shortcuts
Neuroscientist Antonio Damasio helped show how emotions can guide us toward better financial decision making.
His Somatic Marker Hypothesis says that when we have a meaningful experience, our body and mind store emotional “markers” in us. If we’re ever in a similar situation, these gut instincts activate and help us act on what we’ve learned from the past.
This applies to many situations, including money, and puts a surprisingly rational spin on the phrase “trust your gut.” Damasio found that people make slower—and worse—life decisions when brain damage leaves them unable to access their emotions.
2. But shortcuts can be wrong
This isn’t to say emotions are always right. We can fall victim to the affect heuristic, where we make bad decisions by relying too much on emotions rather than concrete information.
But that makes sense. Shortcuts can help or hurt, and emotions are no exception.
That’s one reason to build emotional literacy and intelligence, as these skills help us see emotions as data points that inform whether we should—or just as importantly, shouldn’t—act.
For instance, we should be wary of our emotions when it comes to risk. Research shows that we tend to overestimate risk when we feel negative emotions about a bad outcome, and underestimate it when we feel positive emotions about a good outcome.
That’s why someone may buy a wildly risky investment if they feel good about the small chance of a big return. (Basically, the lottery.)
3. And cause inaction
If a situation floods someone with negative emotions, they may avoid it.
For instance, research shows that someone checks their bank balance more when there’s good news (a new paycheck). But they check less when there’s bad news, like a balance that has dipped too low, which is exactly when they should look.
It’s called the ostrich effect, named after the myth that ostriches bury their heads in the sand to hide from danger. People often struggle to push through these moments, which is a big reason to learn how to work through emotions.
Below the waterline
Here, the connections are under the surface and harder to see. In these examples, emotions can affect specific money decisions, which can then create ripples in other areas of life.
4. Financial worry affects your thinking
If you’re worried about money, it can affect every choice in your life. Research shows that money worries cause a mental hit equivalent to losing 13 IQ points, as much as the loss from an entire night’s sleep. (Though experts debate whether the dip is this extreme.)
It’s why lower-income individuals can perform worse on spatial and reasoning tasks after an unexpectedly high car bill, but not after an affordable one. And why the working class can struggle under scarcity.
And many people—including the middle- and upper-middle class—can worry about money, which is why it’s so important to learn how to work through emotions.
5. And your mental health
The way you work through emotions can improve your mental health, but you have to take the right strategy.
One study found that people had lower depression levels when they processed emotions through cognitive reappraisal, or reframing what you think about a situation to change how you feel about it.
Here’s the catch: cognitive reappraisal only worked when the emotion arose from a situation outside someone’s control. It was linked to depression when the person could control the situation.
The lesson: it’s important to discern when emotions are a call to action and when they’re noise to ignore. The more you can make this distinction—especially with money-related emotions—the likelier you are to improve your mental health.
The deep base
These are the parts we cannot see: how our childhoods include emotional experiences—money-related or in general—that can linger like cigarette smoke into adulthood.
6. Money scripts
In childhood, we learn beliefs from our parents that affect our relationship with money in adulthood. Financial psychologist Dr. Brad Klontz has led research on this and found that people tend to fall into one or more of four money scripts:
Money avoidance:
You self-sabotage due to the belief that money is bad or you don’t deserve it. These people under-earn and often feel guilt about wealth.
Money worship:
You believe that money is the key to happiness and the answer to every problem. These people overspend, buy compulsively, and rack up credit card debt.
Money status:
You believe that your self-worth is your net worth. These people flaunt their wealth, chase status symbols, and keep up with the Joneses.
Money vigilance:
You believe that money demands constant caution and secrecy. These people are intensely frugal, guarded, and anxious even when they can afford to relax.
These money scripts are hard to change because they are deeply ingrained in our emotions, but we can work to rewrite them.
7. Adverse Childhood Experiences
Difficult childhoods can affect our relationship with money.
If someone had a difficult childhood—think abuse, neglect, household instability, money stress—they may have more Adverse Childhood Experiences (ACEs), which are stressful or traumatic events that happen before adulthood.
ACEs are associated with financial insecurity in adulthood, but they can also shape someone’s money responses even if they grow up to make a lot of money.
The more ACEs someone has, the more likely they are to experience toxic stress, which can affect the brain systems that handle planning and complex decisions, while making threat responses more reactive. In other words, someone can have emotional money reactions that are out of proportion to the situation.
This is dark, I know, but the good news is that the brain can change and heal. Someone can work through financial trauma the same way people work through other trauma: through therapy and processing emotions.
Coming up for air
Okay. Coming back to the surface. If that felt like a lot of information, that’s because it was! It’s why I’ll keep this short and sweet. I hope you now see how much emotions and money can intersect, and I’ll cover many of these topics in depth in future pieces. Subscribe below so you never miss a post.
The Q&A Takeaway:
Can emotions help you make better financial decisions?
Yes. Emotions can work like shortcuts when past experiences guide us toward better decisions. That’s the basis of neuroscientist Antonio Damasio’s Somatic Marker Hypothesis: meaningful experiences leave emotional “markers” that reactivate when we face a similar situation. Damasio found that people whose brain damage blocks access to their emotions actually make slower, worse decisions.
What factors affect financial decision making?
Emotions can affect financial decisions as much as income. Specifically, emotions can act as shortcuts that accelerate a good decision or distort how we judge risk. If someone struggles with financial worry, they may have less brain power to make choices in many areas, including with money. Finally, money beliefs learned in childhood shape adult financial behavior without us realizing it.
What is financial psychology?
Financial psychology is the study of why humans do what they do with money. The field looks at many emotional, cultural, and behavioral factors. One sub-field is behavioral finance, the study of how biases lead people to make irrational financial choices. Another is neuroeconomics, the study of what happens in the brain when people make decisions about money.
What is behavioral finance?
Behavioral finance is the study of how psychological biases lead people to make irrational financial decisions. It emerged largely from the work of Daniel Kahneman and Amos Tversky, who showed that people deviate from rational choice in predictable ways. The field covers biases like loss aversion, anchoring, and mental accounting. While it describes the errors we make, it says less about the emotional history underneath them.
Why do people avoid checking their bank account when money is tight?
When someone’s flooded with negative emotions, humans want to avoid the situation. Research shows that people check their balance more often when the news is good, like a new paycheck, but less often when it’s bad. It’s called the ostrich effect, named after the myth that ostriches bury their heads in the sand to hide from danger. To work through this issue, someone should try to address the negative emotions that underlie the avoidance.
