Money on Your Mind: The Brain's Role in Financial Decision-Making

Lennick, Doug; Jordan, Kathy
April 2010
Journal of Financial Planning;Apr2010, Vol. 23 Issue 4, p40
Academic Journal
The sophistication of modern civilization masks the fact that our brains have evolved little since the Stone Age The neural programming of human beings was optimized for physical survival, not contemporary challenges such as financial decision-making. The human brain has separate, dedicated centers for coping with situations that present imminent danger or attractive rewards. When triggered by highly stimulating personal or financial events, these centers can cause the brain to react reflexively, dampening our ability to think analytically. Similarly, our predisposition to look for patterns in events works against us when making decisions about situations that are fundamentally random and unpredictable, such as market volatility and a financial downturn. Technology gives us ready access to our credit, savings, and investment accounts. Unfortunately this access makes it easier for people to act upon impulsive financial decisions. This paper examines a case study to demonstrate how perceived financial dangers or rewards can unconsciously trigger emotions that override our rational decisionmaking. In this example, an investor react to a sudden market downturn by selling investments at a depressed price, thereby missing out on market recovery and locking in his losses. Recent neuroscience research shows that with practice and intensified focus on our underlying values, we can retrain our bran to respond to financial situations more rationally Financial planners also can help their clients develop new methods to read to financial situations in a more analytical manner that is consistent with the clients primary values.


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