When it comes to managing money, people often make decisions based on various psychological factors. One of the most influential of these is a concept called “locus of control,” which refers to how individuals perceive the source of control over events in their lives. Understanding whether a person has an internal or external locus of control can shed light on their financial behaviors and attitudes. Let’s explore these two types of locus control, their influence on financial decisions, and ways to leverage this awareness to improve financial wellbeing.
Locus of control is a psychological concept developed by Julian B. Rotter in the 1950s. It describes the degree to which people believe they have control over the outcomes in their lives.
People with an internal locus of control believe they have the power to influence the course of their lives. They feel their actions directly affect outcomes, so they are more likely to take responsibility and actively work toward their goals.
Those with an external locus of control, however, tend to believe that external forces—like fate, luck, or the actions of others—play a larger role in shaping their lives. These individuals may feel less empowered to change their circumstances, often attributing success or failure to factors beyond their control.
In terms of financial behaviour, these perspectives and mindsets greatly impact how people manage their money, set financial goals, and respond to financial challenges. Financial behaviour of Individuals with an Internal Locus of Control tend to exhibit financial behaviours that promote long-term stability and growth. Since they believe they have the power to shape their financial future, they are more likely to take proactive steps to secure it. Common behaviours include being disciplined with budgeting and saving because they see these actions as directly impacting their financial future. Individuals with an internal locus of control are goal-oriented and often create financial plans. They are more likely to set concrete objectives, like saving for retirement, paying down debt, or investing. Since they believe they can influence outcomes, they may be more willing to take calculated risks, such as investing in stocks or real estate, while also preparing for potential losses. They are also likely to educate themselves on investment strategies. An internal locus of control often leads individuals to actively seek financial literacy. They see learning about finances as empowering and as a way to improve their situation.
Those with an external locus of control may approach financial decisions differently, often with less engagement and a greater reliance on outside factors. Financial behaviours common to this group include a reluctance to save or budget which can lead to impulsive spending or inconsistent budgeting. Since they attribute their financial state to factors beyond their control, they are less likely to set specific financial goals, believing that unforeseen events or circumstances might disrupt their plans. Individuals with an external locus of control may avoid investing or taking calculated risks, as they often feel powerless to affect the outcome. This can lead to missed opportunities for wealth-building. They might also rely more heavily on family members, partners, or financial advisors to make financial decisions, sometimes without a thorough understanding of the implications. This reliance can make them vulnerable to poor financial choices made by others.
Locus of control plays a significant role in shaping financial behavior, influencing everything from daily spending habits to long-term planning. By understanding and addressing these mindsets, individuals can foster healthier financial habits and greater financial resilience. Recognizing that change is within reach and equipping oneself with the right tools and strategies can transform an external locus into an internal one, helping people take charge of their financial futures.
All information and views contained within this article is for informational purposes only and the views expressed do not constitute financial advice. U Consulting makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Please consult a professional financial advisor before making any financial decision.
Nothing presented in the article constitutes investment advice, it does not consider the investment objectives, knowledge and experience or financial situation of any person. You should not act on it in any way and are advised to obtain professional advice suitable to your own individual circumstances. The value of your investment may go down as well as up. You may lose some or all of the money you invest. Past performance should not be taken as an indication or guarantee of future performance; neither should simulated performance. The value of securities may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities.
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Topic – Behavioural Finance