This is your brain on money
You probably wouldn’t be too surprised to learn that certain controlled substances can impact the chemistry of your brain. But what you probably didn’t know is that money can have a very similar effect.
In an article for the Harvard Business Review, author Kabir Sehgal walks through a series of recent studies into the relationship between money and our brains. The findings say a lot about why we make some of the financial decisions we make.
You may be predisposed to taking risks
In one study, researchers asked participants to choose between purchasing stocks (a potentially risky investment with a higher possibility of both reward and failure) and bonds (a safer investment with less potential for reward and little chance of failure).
The researchers used MRIs to scan the participants beforehand. What they found is that participants with greater neural activity in the part of the brain associated with processing reward, aversion, and motivation (the nucleus accumbens) were much more likely to choose stocks over bonds.
This means that for many people risk-taking is hardcoded into their brains. You are likely predisposed to making certain financial decisions due to the make-up of your brain. This isn’t necessarily a bad thing, but it’s something worth noting. If anything it could be viewed as evidence that when it comes to major money decisions it’s never a bad idea to get a second opinion. You are, after all, prejudiced by your own programming. It’s hard – if not impossible – to arrive at an unbiased conclusion on your own.
Your emotions make poor financial decisions
Researchers in a separate study had participants play the “Ultimatum” game. The game is simple. Two players are asked to split an amount of money. One player proposes who should get what. The second player either accepts or rejects the offer. If the offer is accepted, both players get the money. If the offer is rejected, neither player gets any money.
As the choice is between receiving some money or receiving no money, the most logical option would be for the second player to simply accept whatever offer they get. That is not what happened.
Instead, approximately 50 percent of the time when the second player received an offer they considered too low they rejected the offer, preferring to spite the first player in lieu of receiving any money.
Researchers found that when presented with an “unfair” offer a portion of the participant’s brain that helps process emotions like anxiety and pain (the anterior insula) began to fire. The fact that the money was free didn’t matter. Participants felt emotional pain at being lowballed and struck back, costing themselves money in the process.
How often do we let our emotions dictate our spending? It’s a difficult thing to see and even harder to control, but it’s helpful to be cognizant of the relationship between the pain in our heart and the pain in our wallet.
Money is addictive
We’ve long known that gambling has the potential to be very addictive, but researchers recently discovered just how similar money and drugs can be (neurologically speaking).
Participants in one study had their brains scanned while they were playing a game where real money could be won or lost. The scans of players who were winning money were found to be almost identical to scans taken of drug addicts high on cocaine.
“We very quickly found out that nothing had an effect on people like money. It got people riled up. Like food provides motivation for dogs, money provides it for people,” says Dr. Brian Knutson, one of the researchers in the study.
Making money is usually a good thing, but this kind of addiction is dangerous when it leads us to take increasingly big risks in search of a similar “high”. The more we can do to separate out our emotional responses to money, the easier it becomes to make rational, logical choices, which puts us in a better position to succeed long-term.
There may not be much you can do to change the circuitry in your brain, but by understanding how that circuitry works and how it influences your decisions, you can at least become a more balanced and nuanced decision-maker. And when it comes to money, being able to make nuanced, unemotional decisions can be the difference between reaching your goals and falling short.