Derek Hagen, CFA, CFP®, FBS®, CFT™

“I should have studied psychology instead of finance.”

-Advisors everywhere

Money is never just about money. It’s about who we are, who we want to be, and how we live in between.

The Psychology and Money

Advisors quickly discover that clients don’t always follow good advice. Knowing what to do isn’t the same as doing it. Information and logic aren’t enough to change behavior—that’s where psychology comes in.

But there isn’t just one blanket layer of psychology that applies to money. There are three distinct levels, each offering a different lens: behavioral finance, financial psychology, and life planning.

Level 1: Behavioral Finance – Biases and Mental Shortcuts

For many advisors, behavioral finance is the first exposure to the intersection of money and psychology. It focuses on the heuristics and biases that shape human decision-making.

Examples include confirmation bias, recency bias, anchoring, mental accounting, and negativity bias. These shortcuts aren’t necessarily bad; they’re just the way human minds trade speed for accuracy.

Because these patterns apply to all people, behavioral finance can be thought of as money combined with cognitive psychology.

Level 2: Financial Psychology – Beliefs, Stories, and Money Scripts

Financial psychology looks deeper, beyond biases and errors. It focuses on the beliefs, stories, and values that shape each person’s relationship with money.

Whereas behavioral finance applies to humans generally, financial psychology applies to everyone differently depending on their upbringing, culture, and lived experiences. This is where money scripts and money stories originate.

We can think of this as money combined with clinical psychology. Not “clinical” in the sense of diagnosis, but in recognizing that everyone has a unique history that has shaped who they are today.

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Level 3: Life Planning – From Money to Meaning

The final level moves from surviving to thriving. This is where financial life planning and meaning enter.

Stephen Covey once wrote, “If the ladder you’re climbing isn’t leaning on the right wall, every step just gets you to the wrong place faster.”

At this level, we confront mimetic desire, the tendency to look around, copy others, and chase what we think we’re supposed to do. Life planning helps clients break free, uncover what brings joy and meaning, and design a life around that.

This is money combined with positive psychology: focusing not on what’s wrong, but on what’s right.

Using All Three Lenses for More Meaningful Advice

Advisors don’t need to focus on just one of these levels. Each provides a valuable lens:

Behavioral finance helps spot pitfalls and cognitive traps.
Financial psychology uncovers beliefs and stories that drive behavior.
Life planning provides the motivational anchor that helps clients align money with meaning.

Together, these three levels form a more complete picture. They give advisors the tools to move beyond numbers toward advice that helps clients live lives that are not only financially sound, but deeply fulfilling.

FAQ: The Three Levels of Psychology in Financial Planning

What are the three levels of psychology in financial planning?

Behavioral finance, financial psychology, and life planning. Together they provide advisors with tools to move beyond numbers toward meaningful advice.

What does behavioral finance focus on?

It looks at biases and heuristics—like confirmation bias, anchoring, and mental accounting—that influence how people make financial decisions.

How is financial psychology different?

Financial psychology digs deeper into personal beliefs, stories, and money scripts formed by upbringing, culture, and experiences.

What does life planning add?

Life planning moves from surviving to thriving. It helps clients break free from external expectations, uncover what brings meaning, and design lives around that.

Do advisors need to choose just one level?

No. Each lens adds value. Using all three creates a more complete picture and helps clients achieve not just financial security but fulfillment.

Want to Learn More?

Money Quotient trains financial professionals in the True Wealth process and helps them implement the concepts into their practices. The first step is to learn about the Fundamentals of True Wealth Planning.