Wireless security standards are not about encrypting your password, they're about using a password to generate keys and then to use those keys to encrypt your traffic and authenticate your clients
An encryption password is like a key to a lock. The lock doesn't secure its key, the lock secures your house or car or safe deposit box.
Wireless security schemes such as WPA2-PSK are not encryption for your password, they're encryption for your traffic; they scramble the contents of your packets before they're transmitted by the radio, so that anyone listening in can't see what you're doing on the network.
They are also methods of authentication/authorization: Clients that can prove they know the password are considered the true and authorized clients of that network.
But they do have an effect on the crackability of your password or key
Just like a good lock shouldn't reveal any details of what its key looks like, a good encryption scheme shouldn't leak any information about your password, or make your password easy to brute-force.
There are ways in which password-based wireless encryption schemes can have an effect on how easy it is for someone to use brute force (lots of guesses as quickly as possible) to find your password.
In short, WPA2-PSK takes your password and scrambles it together with your network name to generate a long, hard-to-predict key in a very large key space. It does this using a computationally intensive algorithm designed to slow down how many brute-force guesses an attacker can compute per second.
It also makes sure that your password (or key it generates from your password), encrypted or not, is not transmitted across the air. No information about your key is leaked by the authentication or encryption processes, so attackers aren't given any information they can use to speed up brute-force password-guessing. So for attackers to try to brute-force your key, they have to actually try to authenticate against your AP again and again, and your AP can blacklist them or at least throttle the rate of authentication attempts, making it take ridiculously long to try to guess every possible password.
In the bad old days of WEP, WEP didn't have any of these protections. It usually used your password as your key, keys were short, and its authentication method leaked a simply-encrypted copy of your key each time a client joined the network. An attacker could grab that simply-encrypted key and load it on a fast computer (or cloud computing system) and make brute-force key guesses at extremely high rates.
A note on WPA-PSK
You asked what downgrading from WPA2-PSK (AES-CCMP) to WPA-PSK (TKIP) would really do. It would just make you less secure by using less-well-designed protocols for authentication and encryption.
WEP had been based on an encryption algorithm called RC4, but it used RC4 extremely poorly. But the 802.11 chipsets of those days only had hardware to do RC4, so any solution for WEP's flaws needed to make use of RC4, just use it in a much better way. That's what TKIP and WPA did.
But at the same time as WPA/TKIP was being rushed out to patch up WEP, weaknesses in RC4 were being discovered and the new, more secure AES algorithm was arriving on the crypto scene, so it was clear that the way forward would be to build AES hardware into 802.11a-era (2002+) and 802.11g-era (2003+) chipsets. So WPA2 with AES came out right on the heels of WPA, making original WPA obsolete by the end of 2003.
There were vanishingly few Wi-Fi devices that could do WPA/TKIP but not WPA2/AES, and those few devices were 802.11b-only and couldn't even handle joining a mixed 802.11b/g network very well when WPA/TKIP was enabled, and they were probably all off of the market before 2004. It also turns out that leaving WPA/TKIP compatibility mode enabled in a WPA2/AES network increases complexity and exposes bugs, especially bugs that break multicast and service discovery. So unless you have a 1999-2002 Mac with an 802.11b AirPort card, or a similar era 802.11b Lucent WaveLAN, Agere ORiNOCO, or Sony VAIO 802.11b card, you should use pure WPA2-only mode.
Yes it matters. WPA is not longer secure, its is trivial, to attack WPA and break the encryption Your example password isn't long enough by the way, it would be trivial, to brute force the password. – Ramhound – 2016-04-21T12:40:26.940
i see, so by simply selecting WPA2-PSK/AES, the router does something to my password and randomizes it more so it makes it harder for people to crack with whatever cracking programs are out there? – timoseewho – 2016-04-21T12:47:30.530
How WPA and WPA2 work is well documented. Do you have a specific question about them? – Ramhound – 2016-04-21T12:51:29.693
not exactly, just one of those moments like 'hey what does this really do' lol. i guess i can just continue to set my future routers to such settings and set a password and forget about it;p – timoseewho – 2016-04-21T13:00:44.643
Cryptography is an immensely complex topic (perhaps one of the most complex in modern computer science), so yes, you will have to accept experts opinions and assertions about what encryption settings to use. At present WPA2 using AES exclusively (no TKIP) is the best (strongest) option available. You'll want to check back every few years, or every time you set up a new router, to continue to make the best choices. With this kind of topic, you will ahve to accept a happy medium between understanding everything, and nothing. Most IT folks don't know how WPA2 works, just what settings to use. – Frank Thomas – 2016-04-21T13:05:49.930
@timoseewho It doesn't randomize your password it encrypts it. The stronger the encryption method the harder it is to decrypt it (by brute force or by exploiting any weaknesses in the encryption algorithm). – DavidPostill – 2016-04-21T13:06:56.090