The Real Reason Money Advice Doesn’t Stick — And What Behavioral Finance Reveals
How is Behavioral Finance different from Traditional Finance?
It comes down to emotion vs logic. Traditional finance assumes people make rational decisions based on numbers and complete information, while behavioral finance recognizes that emotions, desires, fears, and biases often drive real-life money choices. The best approach blends both—using logical tools like budgets and boundaries while also accounting for human psychology, emotional triggers, and relationships. This balance makes financial plans both realistic and sustainable.
The Myth of the "Rational Investor"
Have you ever sat with someone who calculates a financial decision based purely on information, seemingly without fear or excitement? Perhaps they’ve told you, “Look at the stock market over time. It goes up. Invest.” But you just sit there frozen, because you don’t know the first thing about the stock market.
What is a stock, anyway? How do you know you won’t lose everything when the stock market plummets? Didn’t you just hear that the stock market fell by 500 points? What does that even mean? The logical person across from you starts a money lesson beginning with 1873’s great financial crash… and your mind wanders.
We’re taught that money is all about logic and numbers, so why don’t we (or why can’t we) just act logically with our money?
There are two schools of thought when it comes to economics and behavior. The first is Traditional Finance, which assumes that if you are given facts, you’ll make a logical and reasonable decision.
The second is Behavioral Finance, which acknowledges that we are much more impacted by emotions and how we feel in regards to our money decisions.
For a complete, foundational overview of this field, read our guide: What Is Behavioral Finance? A Complete Guide to Understanding Your Money Mind
Both of these views impact you. While understanding both of these schools of thought is important, emotions—when it comes to money matters—matter more than we think!
What is the Traditional View? — A World of Perfect Logic
The traditional financial view is one we’ve all experienced: the financial advisor giving us facts, figures, and pie charts. This approach operates on the idea of the Homo Economicus—the ‘economic man’—a perfectly rational individual who always has complete information to make the best possible financial decision.
Economics is the study of of how people make decision about money.
The traditionalist is like a chess grand-master, who views the entire chessboard as a whole, has all the pieces in place, and makes decisions wholly without feelings or emotions.
What Is Behavioral Finance? – Understanding Human Emotional Motivations
Behavioral psychology emerged in the 1970s after Daniel Kahneman and Amos Tversky, and later with Richard Thaler, analyzed how people made decisions based on certain biases.
This led to a new understanding: human behavior is grounded in different biases—like mental accounting, which I've talked about in a previous post—treating money differently depending on its source or purpose.
These economists were looking at how people behaved in the stock market with their decisions—especially looking at herd mentality, mental accounting, and loss aversion. We can look at people’s financial behavior with a new perspective, one that acknowledges their often-irrational fears.
Examples of Illogical Financial Choices
Examples of irrational financial choices might look like:
Spending money you shouldn’t on a family member because you feel guilty that you have more money in your bank account than they do—even if you’re up to your eyeballs in debt.
Spending way more money on girls' night than you feel that you should because you feel pressured by what your friends are doing around you.
Or staying up late because you’re fighting with your spouse and heading to Target or Amazon online to buy something to make you feel better.
None of these behaviors and money decisions are based in logic.
In the first one, logic would say, “I have bills I need to pay and I’m trying to get out of debt. I don’t have money to share yet.”
In the second, the logical statement would be, “I have set this amount of money aside, and this is what I’m spending, regardless of how my girlfriends are acting or commenting.”
The third logical response to the situation is to say, “I’m upset and I need to work this argument out—not spend money to feel better.”
When contrasted with the logical opposite response, it’s easy to see how emotions and relationships impact our money far more than a logical or practical response.
“Behavioral finance validates that emotions aren’t necessarily a weakness—they’re a factor we must plan for.”
Why Blending the Two Works Best
It’s easy to find flaws with both approaches:
Traditional Finance is too rigid and doesn’t account for human irrationality.
Behavioral finance’s weakness is that while it helps us understand the why behind our mistakes, it doesn’t automatically give us the how to fix them."
The hybrid approach is the best way forward. It combines rational, logically based behaviors like setting budgets, defining financial boundaries, and diversifying investments. These actions are essential tools for reaching your financial goals.
But we also need to account for our desires, needs, fears, excitement, and even our need for rest.
My Own Story as an Example
I remember this firsthand when I was creating my first budget with a financially sound mentor, who was very wealthy. As we walked through it, I was so embarrassed. I had spent money on mochas and lattes nearly every day when I lived on my own, and most of my credit card debt was due to this unthinking, urge-based behavior. To fix it, I said I’d cut out every fun thing to throw every extra penny at my debt.
“Hang on,” he said. “If you don’t allow yourself anything fun or rewarding, you’re going to stick to too tight of a budget and you’ll break it. You should get a latte every Sunday before you teach Sunday School and go to church. But don’t get one every day!”
And I did! For 2.5 years of paying off my credit card debt, I controlled my desires for a fancy coffee by treating myself to one a week (Paying cash and using the envelope system).
Why a Blend Matters
Getting ahead financially isn’t just about the numbers. It’s about building a system that accounts for your human nature, emotions, and psychology. That's where logic and reason become the structure you use to get ahead.
Traditional Finance depends on logic, rational decision-making, and numbers to help clarify the way. Behavioral Finance acknowledges that our emotions, especially fears and desires, drive us to make decisions that don’t always make logical sense.
Traditional finance tells us what we should do; behavioral finance helps us actually do it.
It's not about being a perfect rational investor. It's about being an aware, mindful investor who understands and manages their emotions and relationships—and in doing so, manages their budget.
If you’re curious how these ideas can help with your money story, let’s talk. Book a free intro call here and start creating a plan that acknowledges both the math and your mind.
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