In the course of our Money Psychology series, we have learned that the decision we make, spend or save money is heavily pegged on how we relate with our money.
This relationship is built over time and it creates the platform of how most people deal with or treat money.
As we progress with the series, this week we look at Financial Self-Efficacy derived from the famous Self-Efficacy concept coined by psychologist Albert Bandura and which refers to one’s expectations in their ability to engage in a particular behaviour for a particular outcome.
Thus, Financial Self-Efficacy could be defined as one’s beliefs in their abilities to accomplish a financial task or goal.
Again, financial self-efficacy is the perception or belief that one is in control of their financial situation. A person with a high financial self-efficacy believes that whatever their financial decisions, they will lead to productive outcomes.
Characteristics of high financial self-efficacy
In his book titled Self-Efficacy, Bandura notes that people's beliefs about their efficacy can be developed by four influences. These include:
1. Mastery experiences
Being successful builds a strong belief in one's personal efficacy while failing when a sense of efficacy has been established could undermine it. Bandura notes that when people consistently experience success, they become accustomed to the trend and start expecting quick results. Any failure easily discourages them.
By facing and overcoming failure, those with mastery experiences get a resilient sense of efficacy which requires experience to persevere.
In pursuing success, the setbacks and difficulties people experience are useful in teaching them that success continuously requires sustained effort.
Being convinced that one has what it takes to succeed enables them to persevere if and when they face setbacks. This knowledge helps them stick it out through tough times emerging stronger from adversity.
2. Vicarious experiences
Growing up in a society where one sees their kind succeed affirms their resolve by creating and strengthening self-beliefs of efficacy provided by these successful people who could be their role models.
Witnessing people with a shared heritage with oneself succeed through sustained effort increases the observers' beliefs that they too can make it since they possess the same capabilities to enable them prosper.
Likewise, seeing others fail despite their effort lowers the observers' judgments in regard to their own efficacy which may, in return, undermine their efforts.
The impact of vicarious experiences which are modelled on the perceived self-efficacy of others (influencers) could strongly influence what is perceived by the observer.
Since models influence people who aspire to be like them, they do more than provide a standard against which their observers judge their own capabilities.
3. Social persuasion
Affirmation is a strong way to let people know that they have what it takes to succeed.
This affirmation, which can also be referred to as social persuasion, strengthens people's beliefs that they possess the capabilities to push themselves and sustain their motivation. Social persuasion helps people continue with their cause by addressing their self-doubts and dwelling on personal deficiencies in the face of a challenge.
Persuasive boosts lead people to try harder to succeed while promoting skills development and a sense of personal efficacy.
In reality, instilling high beliefs of personal efficacy by social persuasion alone is difficult but very easy to undermine it using the same approach. By offering unrealistic boosts in efficacy, the disappointing results of one's efforts quickly prove otherwise.
Since this is a social concept, people who feel that they lack capabilities will tend to avoid challenging activities thus they are limited to achieving their full potential.
4. Emotional arousal
Bandura adds that people also tend to rely on their somatic and emotional states to judge if they have what it takes or not. Some will interpret how they react to stressful situations as signs of vulnerability to poor performance.
In activities that involve physical engagement, fatigue, aches and pains could be perceived as signs of physical debility.
One’s mood can also affect how people judge their personal efficacy. A positive mood increases perceived self-efficacy and the opposite happens if the mood is despondent.
The best way to deal with emotions in self-beliefs of efficacy is to reduce one’s stress reactions and change their negative emotional inclinations.
Despite all the difficulties in attaining self-efficacy, the other way to look at it is thinking: confidence.
If you believe that you can do a particular thing, this is the determining factor which helps you anticipate success. A 2016 research at Monash University in Melbourne, Australia, showed that feeling confident activates reward networks in the brain while lack of it increases brain activity linked to negative emotions like anxiety.
The competing rivals for your actions and attention are usually confidence and anxiety.
Since anxiety inclines you towards avoiding failure and confidence impels you forward in anticipation of reward, it is best to be confident about one’s true abilities which will increase outcomes that lead to more opportunities and rewards.
How to build self-efficacy
Since self-efficacy is a psychological skill that you can adopt and grow, here are ways you can get better.
Celebrating your success
However small, start by celebrating your successes. Once you have mastered your experiences, this is a reason for celebration.
Succeeding at something will help you build a powerful belief in your abilities. The biggest celebrations could be if you have overcome failure which will help you build a sense of personal efficacy.
Do you have a role model? If so, learn by observing them because by identifying the vicarious experiences obtained through peer modelling, you can establish and strengthen self-efficacy.
Ensure that your model is as similar to yourself as possible. This does not have to be physical.
What are your thoughts and emotions?
To improve your chances of accomplishing what you set out to, look for ways to manage your thoughts and emotions. For instance, if you are nervous or stressed out before an event, look for ways to ease your stress. Replace negative thoughts with positivity and self-belief.
Want to be affirmed?
Avoid seeking feedback from people with a negative or critical view of your performance.
However, feedback from all people can be important to help you improve on your self-efficacy.