How to Improve Your Money Mindset: The Psychology of Money

Let’s look at a few far-reaching psychological concepts that play an outsized role in our financial lives, including some of the biases and fallacies that can point us in the wrong direction.

Understanding each of the money psychology concepts here will help you approach your finances more rationally and avoid some of those poor decisions that stem from cognitive bias.

Optimism bias is the natural tendency to overestimate the likeliness of positive outcomes and underestimate negative ones.

Optimism Bias


Pessimism bias, (also known as negativity bias), draws our attention away from positive circumstances and causes us to weigh negative stimuli more heavily.

Pessimism Bias


Negativity bias can cause us to subconsciously exaggerate the impact of market downturns in our minds and overreact to perceived financial dangers.

While adapting to adverse scenarios works well for our survivability, we can also adjust to pleasant things we enjoy. Over time, things that were once exciting and new become familiar. 

Hedonic Adaptation


The sunk cost fallacy describes the human tendency to keep doing something we have started, even if it isn’t working out.

Sunk Cost Fallacy