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A new paradigm in the nick of time

By James W. Gottfurcht
FINANCIAL ADVISORY PRACTICE

Welcome to the inaugural "The Psychology of Money" column. Its purpose it to provide cutting edge psychological information and practical tools so the financial advisor can develop a unique set of value-added services. As these services are integrated into the advisor's style of practice, he or she will be able to meet personal and clients' needs better. Some of the benefits that have accrued to my clients include making more money, enjoying their own client relationships more, and feeling greater financial empowerment.

There are three major ways "The Psychology of Money" can help the advisor with a practice:

1. insights from my 24 years of practice give an advisor a real edge over colleagues in understanding and reducing irrational financial behavior in him or herself and clients.
2. Proprietary discoveries, including a new way to understand risk tolerance and client expectations that can enhance performance, trust, and relationships will be revealed.
3. Experiential exercise and responses to subscribers' written questions will make learning more enjoyable and interactive.

Since competition for clients has become more intense, new psychologically oriented services will give subscribers another advantage over discount brokers, other less experienced advisors, and on-line trading.

A brief look illustrates how the landscape has changed in just the past two years:

  • Merrill-Lynch joins on-line deep discount trading.
  • High quality research abounds on the Internet.
  • Individuals act as their own discount brokers.
  • CPAs are now allowed to offer financial services.
  • Less qualified Associate CFPs may be allowed to use a similar designation to compete with CFPs for less lower fees.

    Any way you look at it, the financial advisor is being squeezed - and from many sides! One way to fight back is to acquire new tools to become more successful in managing and growing a practice. This column can help by presenting a unique set of easy-to-use psychological money skills to help identify and overcome the advisor's own and clients' personal money traps.

    This issue's column will provide a foundation and context to understand "The Psychology of Money". Future columns will present proprietary exercises, examples from consulting with advisors or clients, and excerpts from The Psychology of Money Profile. The Profile is a questionnaire that assesses ten core Psychological Money Skills emphasizing a new way of understanding risk tolerance and client expectations. Also, I encourage readers to write in questions for me to answer. Finally, I will look for key people to interview who offer their experiences of implementing "The Psychology of Money" into their practices - real advisors who will talk about the benefits and potential dangers of going psychological with clients.

    WHY NOW for PSYCHOLOGY of MONEY?

    I have three intriguing questions to raise:

    1. Why is psychology becoming such a hot topic within the financial services industry?
    2. Why are personal finance books with a psychological orientation becoming more popular?
    3. Why are major financial service organizations like MasterCard, the IAFP and ICFP, CUNA and Mackenzie Financial Services increasing their reliance on psychological approaches?

    The answer to all three questions is: The industry realizes that money is an emotionally charged issue. Most advisors now understand that irrational decisions come from our childhood experiences and psychological programming. When money issued "heat up", financial logic usually "goes the window".

    As a clinical psychologist and consultant to the financial services industry, I can state with certainty that money holds a pre-eminent position in peoples' minds. In fact, I believe than money is a greater preoccupation than ever before, and in entirely new ways. For some people, this is an enjoyable state of affairs. There are definitely individuals and couples who are very comfortable with their relationship to financial issues. However, I am also convinced that worrying about money-related issues is now the single greatest source of stress and pain in people's lives - more than health, relationship, addictive behaviors, and sexual difficulties.

    For so many otherwise well-adjusted and empowered people in today's world, money creates anxiety, causes conflict, and engenders fear. These stressful experiences over money also cause physical and mental health concerns such as sleeplessness, high blood pressure, tension headaches, anxiety attacks, depression, and intensive power struggles and arguments. Money is also at roof of an increase in compulsive and addictive behaviors. People struggle to escape financial stress through drinking, drugs, and sex or try to overcome it through gambling, the lottery, and day trading in the stock market. Financial problems are like an iceberg in that the piece showing above the water represents only a small fraction of the difficulties lurking underneath.

    Like most problems, this one also includes an opportunity. By resolving the difficulties that money creates, we can remove the greatest obstacle to happiness and fulfillment from many or our clients' lives and our own, too. We can reduce financial worry, fear, and irrational behavior; and we can help replace theses painful experiences with confidence, peace of mind, and rational action.

    HOW IRRATIONAL BEHAVIOR DEVELOPS

    Nearly all of y financially stressed students and clients blame themselves for not having more money. This encumbers them with all sorts of guilt and blame that only makes it more difficult for them to believe they have any right to success. They suffer from self-criticism, embarrassment, or shame. Many are reluctant even to talk about money.

    In working with clients the new Psychology of Money Paradigm, I believe in a user-friendly, self-esteem building approach. My position is that clients are not lacking intelligence or sound judgment. Let me clarify by sharing an analogy I use with many clients: If you don't know how to speak Greek, is that your fault? Unless someone taught you the words, grammar, and syntax, how could you possibly know how to speak the language? Similarly, my experience has shown me the number one reason why 97% of Americans are unable to retire with financial independence: Our parents, relatives, and teachers have not provided us with the psychological and financial principles, guidelines, and experiences for creating wealth. In fact, much of what we have been taught psychologically has hundred our ability to succeed with money. It is no wonder, when it comes to money, many of us feel, "It's all Greek to me!"

    How did we get this way? How did money, fear, and conflict become so bound up in our collective psyche? How is the way we feel about money today different from what was true in the past, and what does it share with the experience of other generation? As a first step toward solving the money-related problems that plague so many people, it is vitally important to understand the context that gave rise to them.

    According to psychology, loss is the most traumatic event that people experience. Loss of a love relationship s considered to be the most painful type to most of my clients for two basic reasons:

    1. Money has become vital to secure good housing, education, healthcare, independence, and a variety of consumer goods, which has linked it in peoples' minds to power, success, love, self-esteem, popularity, and health.
    2. The information age, global economy, great stock market boom, aggressive advertising, low interest rates, huge credit card borrowing, and record bankruptcies have combined to make money more important than ever.

    I also want to emphasize that how we think about money today is a result of how we learned to think about money when we were growing up. Chances are our "teachers" in this regard were our parents or other family members who, explicitly or implicitly, conveyed the messages that we are still acting upon today in our relationship to money and financial issues.

    I know this is true from my clinical work, and I also have seen it in my own life. When I was growing up, if I left the light on in my room even for five minutes, my father would notice every single time. His standard refrain, which I can still hear as if it were yesterday, was this: "Do you work for the Electric Company? No? Then go to your room and shut it off!" I would trudge up the stairs, feeling like a fool, and feeling guilty for wasting my father's hard-earned money, and I would go turn off that light.

    We must have played out that little drama dozens of times. Psychologists would predict that when I grew up, I would likely behave in one of two ways with the electricity. Either I would repeat the pattern and turn out the lights like my father, or I would rebel and leave the lights on. As a teenager, I made up my mind to rebel. It worked all the way into middle age, until my daughter became a teenager-and left the lights in every single room. So, guess who gas become the "light cop" in my family? That's right, despite my intellectual awareness, I am irrationally carrying on the family tradition of saving electricity - to the tune of about $10 a year.

    The important point here is that nobody ever sat me down and formally taught me that "If you do this, we'll all go broke" or "If you do that, you'll get rich". Although I did get some very helpful financial guidance from my father, much of my learning took place accidentally, haphazardly, and even unconsciously. The same is true for most people.

    Most of us learned how to think about money at uncomfortable moments just like when my dad told me to go back upstairs and turn off the light. The way we think about money shaped way back when we were children by two things:

    1. Watching our parents, grandparents, and other caretakers handle their money.
    2. Being on the receiving end of how they treated us when we handled money.

    I am saying that the foundation of irrational financial behavior can be found in what we learned about money during the most formative years of our lives - or more likely, what we did not learn. Instead of learning in an organized way, with proper instruction and role modeling, most of us stumbled on our ideas about money in an accidental or random fashion.

    Most of us did not have anyone to guide us over a period in an unemotional, respectful, and patient manner about the role of money in people's lives. That happens for one in a million, and I would not be a bit surprised if those lucky few are also millionaires. For the most part, our notions about money come to us with the same combination of guilt and lurid interest that used to characterize our references to sexuality. While parents, schools, and society as whole have become much more aware of the importance of helping young people cultivate healthy attitudes about sex, money still comes into our consciousness through random messages that typically have overtones of envy, anger, and fear.

    Of course, our parents and role models did not intentionally try to confuse us or sabotage us with money. They simply did the best they could, given the way they were raised and the knowledge available to them. Since the influence that thoughts, feelings, and attitude have on money is a relatively new field, our parents probably grew up understanding little about it. I am not advocating any blame toward our parents. Instead, "The Psychology of Money" is about how we can take responsibility for "unlearning" beliefs and attitudes that do not serve us - and learning better ones that improve our financial well being.

    PROSPERITY THINKING VS. POVERTY THINKING.

    To deal with these and many other issues many have with money, I would like to introduce two phrases that we will be using many times throughout these columns. These terms are not new; I did not invent them. However, in the columns that follow we will be calling upon them in entirely new ways, and with sharply focused attention to the roles they play n everyday life.

    The phrases I'm referring to are "prosperity thinking" and "poverty thinking". For our purposes, "prosperity thinking" can be defined quite simply as a trusting attitude that things will work out. It's an optimistic state of mind, and an empowered state of being with money. Prosperity thinking means aligning thoughts, feelings, and attitudes toward abundance and gain. It increases financial and personal self-esteem and assists in learning how to use feelings and intuition to deal with money more successfully.

    "Poverty thinking", on the other hand, is a mistrustful state of mind that says things will not work out. It embodies pessimism, fear, and a passive way of being with money. Poverty thinking aligns thoughts, feelings, and attitudes toward scarcity and loss. It diminishes financial and personal self-esteem and decreases confidence in handling money.

    PROSPERITY THINKING - aligning your thoughts, feelings and attitudes with abundance, optimism or confidence leading to rational financial behavior.

    POVERTY THINKING - aligning your thoughts, feelings and attitudes with scarcity and pessimism or fear leading to irrational financial behavior.

    Although prosperity thinking and poverty thinking have opposite meanings, the same external events can be experienced quite differently by two people depending upon the context. In explaining this, I often use the expression that, prosperity, like beauty, is in the eye of the beholder. A behavior that is prosperity thinking for one person may be different for another.

    Suppose, for example, a man loses $20 out of his wallet while walking on the street. When he retraces his steps to look for the money, he sees a homeless person picking up the bill a moment before he can retrieve it. He could have a poverty thinking experience with the event by feeling victimized that he just missed recovering his money.

    In contrast, he could react in a prosperity-thinking way by appreciating the irony that someone who needed the money much more than he did got the $20. He could feel good about himself that his mistake helped another human being, and be reminded that he has a lot for which to be thankful. He could view it as a relatively inexpensive lesson to be more careful with his money. Over the years, many writers have devoted their attention to helping people increase their prosperity thinking. Two major influences have come from multimillion best selling authors. "Think and Grow Rich" is phrase that was coined long ago by Napoleon Hill, while the same is true for "The Power of Positive Thinking" by Norman Vincent Peale. In one form or another, they have become mantras for scores of books, tapes, and videos on personal financial issues.

    Right now, I am going to make a statement that is at odds with the conventional wisdom these books have advocated about people and their money. I am absolutely convinced that for most people, overcoming poverty thinking is much more important that strengthening their orientation toward prosperity.

    In my talks to the financial services industry and in my classes at UCLA, I ask if people think they can become more successful with money by increasing their prosperity thinking or by decreasing their poverty thinking. In almost every case - even in many groups of psychologists - the most majority think they can become more successful by increasing their prosperity thinking. So I continue by sharing my experiences.

    Again and again I meet people who are dressed well, who own their homes, who drive new cars, who takes several vacations each year with their families - and who are filled with anxiety about money. This is not really because they do not know how to focus on prosperity. They are already living more prosperously than previous generation ever dreamed of. The stress these people feel derives from lingering, often unconscious poverty thinking that prevents them from fully enjoying what they have. Over time, the influence of poverty thinking can indeed destabilize their financial lives in very real ways.

    I like to use the analogy that our relationship with money is like a financial vessel. It does not take gaping hole in the hull to sink an ocean liner. Even a small hole will do it, especially if no one even knows it is there. With money, just one investment or career decision based on poverty thinking motivated by ego, panic, or greed can severely damage a financial position.

    I was reminded of this not long time ago while watching the movie "Titanic". As the movie depicts, the maiden voyage of the Titanic in 1912 was an outstanding instance of prosperity thinking undermined by a hidden fear of failure. By throwing caution to the winds in order to exceed people's expectations for a trans-Atlantic crossing, by ignoring iceberg warnings, and by eliminating half of the life boats to widen the ship's aisles, the Titanic's captain and owners revealed a hidden insecurity and arrogance that eventually cost more than 1500 hundred lives.

    Despite their great success in building the largest and most opulent ship of the era and in attracting the world's attention to its inaugural cruise, they kept raising the ante. They were trapped by their fear of somehow disappointing the public, rather than enjoying the prosperity and success of what they had already accomplished. In a sense, the Titanic's decision-makers were like people who keep spending on credit to buy more and more consumer items. Of course, as is so often the case, they can never, buy enough external success to satisfy their inner insecurities. As most of us learn sooner or later, bigger, better, and faster does not always fulfill us in the ways we imagined.

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