The phenomenon of money and human psychology

Does raw human emotions dictate your financial decision or are we rational calculators of our own self-interest. It’s a bitter scientific debate that has real world consequences.

What happens when two powerful forces meet, clash or collides with each other, Money and Mind, what control what? Whether its money who controls the mind of the people or it’s the mind who controls the money. Find out the answer with me and the some of the world’s top psychologists brain and Nobel Prize winner.

Our behaviour is bizarre when it comes to money human mind is rational, an average person calculate his wealth, selfish and he does not want to pay even a single cent more than what a product is worth for, whether it’s a cab ride or retirement plan, our mind adapt the beneficial part and try to avoid the loss. Agree?

If yes then think about the experiment, that has been carried out by a team of psychologist with some peoples, a bid of 20$ note. The conditions of bid are simple that one which bid the highest will get the 20$ note with a catch that the second highest bidder will get nothing but pays the bid amount. Bid started with 22$ and gets as high up to 28$, logically if human mind behaves rationally and always think about the possibilities of increasing his wealth then why and how could anyone pay 28$ for a note of 20$. Here comes the emotions that dictate the human mind. Emotional desire to win and fears to being looser drive even higher. Prof John Cockran from University of Chicago stated this complete experiment as “How people behave is what they want”.

200 years ago there was an economist Adam Smith known as father of Economics wrote a book “Wealth of nations”, in which he gave some very basic insights of economics and some formulas of how the markets, economy and peoples mind behave when it comes to money. Adam Smith’s models and equation still used by economists to shape policies, setting interests and loan borrowing limit. He has also expressed his believe in free market, maximum money regulation and minimum government influence which is now the set ground rules of any economy. But how this rules have so much impact on economy and does this affect the individuals too and is it linked in any means with human psychology, if yes how?

As stated earlier according to psychology humans are rational and can coordinate them self for personal interests and rational mind keeps whole economy stable. Equations given by Adam Smith in his book does clearly depict how rational people take their financial decisions, that's strange but true. Sometimes study of these rational greedy peoples gives us very interesting facts. Justin Fox from Harvard business review stated that "In an study of rational greedy people on making decisions of trying to get enrich them self. It turns that you can come out with some pretty ways of expressing them mathematically".

Adam Smith in his book also reveals the secrets of how market and economy works, bubbles theory and how they burst the economy. In 2005 times were good, market was booming and long continued, real estate was rising at 6% per year and in some places it was as high as 25%. Some economists then warned the threat on economy stating that America is in a grip of huge rational area. Down in 2008 fear grips the market and stock market started collapsing, there comes the rational behavior of peoples as they started withdrawing money from the market in fear of losing their money. This results even more worse as everybody was in hurry to sell and nobody was buying, this leads to the price of stocks going down rapidly for small companies to big giant firms. Stock market drops till 40% and American investors have lost their 40 trillion dollars in market. It took market 5 years to grow higher as much and just 3 days to collapse. The consequences of such crisis are beyond imaginations such as global economy can come to a halt, hunger, war, unemployment and can pull countries up to 100 years back.

The triangle between money, psychology and economics and their relation is amazing with many unanswered questions and their answers in  the womb of future.