Q1 2025 Commentary: Understanding Behavioral Finance & the Four Money Scripts

Pine Haven Investment Counsel, Inc. – Commentary – 1st Quarter 2025

Casey Fitchett & Paige Johnson Roth, CFA®

Market volatility discussions are trending right now – and for good reason. Around every corner there’s another discussion of the moves you should (and absolutely should not) take now to protect your portfolio. While performance gets all the airtime, it is crucial to occasionally take a step back from the hard data and focus on another topic that affects every investor: behavioral finance. The way we think about money is shaped by our experiences, upbringing, and emotions, often in ways we don’t fully recognize. Understanding these influences can help us make more rational financial decisions and avoid common pitfalls.

Behavioral finance “explains often irrational financial behavior, such as overspending on credit cards or panic selling during a market downturn.”¹ Having the language to describe cognitive biases and tendencies can bring more acute awareness to how best to handle any financial situation that may come your way.

Some of the most popular predispositions include overconfidence, herd mentality (FOMO), loss aversion, confirmation bias, mental accounting, and anchoring.

Overconfident investors often overestimate their knowledge or ability to predict market movements, which can lead to excessive trading, taking on too much risk, or failing to diversify properly. The herd mentality describes the tendency to follow the crowd, often driven by fear of missing out (FOMO), and can result in buying assets at inflated prices or selling in a panic during downturns. People tend to feel the pain of losses more intensely than the pleasure of gains, which can lead to an aversion to loss that manifests in overly conservative investment decisions or reluctance to sell losing investments.

Investors naturally seek out information that confirms or supports their existing beliefs while ignoring data that contradicts them, reinforcing potentially flawed decision-making. We believe most people find themselves doing some version of mental accounting, which is the habit of treating money differently depending on its source or intended use (e.g., spending a tax refund more freely than regular income). Lastly, investors can be guilty of anchoring themselves to an initial reference point (such as a stock’s past price or the price they paid for a stock). This can cause investors to hold onto losing investments or set unrealistic expectations for future performance.

Another framework for examining financial behavior is the concept of “money scripts,” developed by financial psychologists Dr. Brad Klontz and Dr. Ted Klontz.² Money scripts are unconscious beliefs about money, often formed in childhood, that influence financial decision-making throughout our lives. While these beliefs can be helpful in some situations, they can also lead to financial stress or poor decision-making when applied too rigidly.

Most people have a combination of these scripts, with one or two being dominant. Recognizing our own tendencies can help us make more intentional financial choices. For example, if someone leans toward money avoidance, they may benefit from actively engaging in financial planning to build confidence. If someone is overly money vigilant, they might need to find a balance between saving for the future and enjoying life today.

As we navigate uncertain economic conditions, being aware of our financial behaviors is just as important as understanding market trends. A disciplined investment strategy is important, but so is the ability to manage emotions and biases. If you find that certain patterns are influencing your financial decisions in ways that don’t align with your goals, it may be helpful to explore those beliefs and make adjustments where needed.

Understanding the psychology of money isn’t about changing who we are—it’s about using self-awareness to make better financial choices. If you’re interested in discussing how behavioral finance affects your investment strategy, we’re always here to dive into that conversation.

"What Is Behavioral Finance?", Raymond A. Mason School of Business, https://online.mason.wm.edu/blog/what-is-behavioral-finance
"Types of Money Scripts", Smart Asset, https://smartasset.com/advisor-resources/money-scripts