The Brain & Money

On Second Thought: How We Make Financial Decisions

My reading this week led me to the intersection of neuroscience and money. Inspired by Jason Zweig’s book Your Money and Your Brain we’ll look at the reflexive brain vs. the reflective brain. These concepts help us to understand some of the biological forces at play and how our emotions get in the way of making good financial decisions.

According to Zweig the reflexive brain, located primarily underneath the cerebral cortex, registers excitement by rewards like money, sex or a trip to Hawaii. It also reacts to danger, real and imagined. It translates sites, smells and sounds into information we need to keep ourselves safe. In the blink of an eye something labeled as dangerous can stimulate our bodies to be afraid, a reflex, that triggers a chemical reaction we experience as fear.

The reflective brain, primarily associated with the prefrontal cortex, is our chef in the kitchen, or CEO if you will, fabulous at planning and problem solving. Think cool evaluation of the pros and cons before making an informed decision.

While these reflective processes can happen quite rapidly, they hold no candle to the speed at which our reflexive brain can respond. The reflexive mind is off and running before the reflective brain has even put its sneakers on! Imagine doing your taxes and thinking you ought to contribute to your retirement account. Your significant other says, “Gosh, it has been so long since we’ve been to Hawaii.” Your reflexive brain registers that as reward and before you can say, “But…” you feel yourself walking out of the airport in your shorts, the smell of plumeria floating in the warm moist air.

Likewise when we feel stressed or fearful around a financial issue. It is best not to decide anything too quickly as your emotions have already taken center stage. Allow time for the reflective part of your brain to get involved.

The implications of looking at the brain this way are extremely important! We need to take a closer look at our decisions and the process. Given the speed and power of the reflexive brain we easily make emotional decisions. Just as common is that we make the emotional decision and then invent the rationalization that justifies it. Either way, finding a way to involve your reflective brain is paramount to making better choices with your money.  Financial planning can help!

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