This Is Your Brain On Money

Neuroscience helps explain how we handle money

By Dr. Maha Alattar / Source: Fredericksburg.com

Money has the power to stir emotions and create drama fitting for a Shakespearean play. A raise in your salary gives you joy, but misery comes if you gamble your money away. You don't mind risk taking because it paves the way to future success, but you're panic-stricken when you lose money invested in stocks.

Then there is greed, one of the seven deadly sins in early Christian writings and the subject of a painting -- "The Seven Deadly Sins and the Four Last Things" -- that depicts greed as misers being boiled in a pot of gold.

What role does your brain play in the pursuit and handling of money?

Your brain wants you to be safe and alive, so it makes you go after basic human needs like food, shelter, love and the safety of a social group, i.e., family. But when you want to make money -- which often involves risk taking and calculating probabilities -- your brain doesn't necessarily feel safe.

Our brains are cravers: chocolate, ice cream and even alcohol. The brain doesn't want to bother with futuristic, "maybe" rewards. But the wise and smart parts of our brain will say: "Hold on, wait a minute, let's reassess" before we make a decision.

This momentary, alternative thinking helps us resist making impulsive financial choices that feel good during a shopping spree, but not in the long term.

Money, Joy, and Pain

The power of choice is within us when it comes to handling money in ways that won't cause pain.

Brian Knutson, a neuroscientist, studies the brain as it relates to money. Knutson uses special MRI images in his experiments while people are handling money. One thing he's found is that when cash is offered to someone, dopamine is released in the nucleus accumbens, a part of the brain that is involved in reward and addiction.

So, money can make you happy quickly. But Knutson's research -- published in Neuron in 2007 -- also showed that losing cash can cause pain.

When people were in the midst of deciding to purchase some items, the emotional parts of the brain were activated. When the product was anticipated and desired, the nucleus accumbens (involving dopamine release) was activated.

But when the thought of financial loss was entertained (because of excessive prices), a part of the brain called the insula was activated. The insula typically "lights up" in people who feel or anticipate pain.

What is fascinating is that these areas have anticipatory effects that precede the decision to purchase. Consider this thought: "If I buy this lovely yet pricey perfume bottle, what would I have to give up in the future because of the money I am about to spend and lose?" Such thinking makes you go through imaginary checks and balances, pleasures and pains, before you open your wallet to the world.

What Knutson's research means for people in practical terms is that competing parts of your brain are at play when you make purchasing decisions. There's the pleasure-seeking part, and the part that wants to avoid pain.

If you can take a moment to contemplate the pain of being parted with your money, you might be less inclined to take risks or make big purchases.

Savers and Spenders

The neurology of a shopping spree tells us that the brains of people who spend frivolously are wired differently than those who hold on to that last penny. Most people get pleasure out of owning the newest iPhone or going on a Caribbean cruise.  "Hell-with-tomorrow" is in operation here.

But savers and spenders have different traits that are independent of intelligence or rationality.

If you are a saver, you are better than your spender buddy at picturing what "not saving" looks or feels like. In other words, you have a sense of your self in the future that is different from the picture of your current self. So, you are better able to see that you might regret spending your money.

This is described by the "future self-continuity" hypothesis. In one experiment whose results were published in the journal  Judgment and Decision Making in June 2009, people who rated higher on the future self-continuity index had a greater lifetime accumulation of financial assets regardless of age or education.

The take-home message is "Don't stop thinking about tomorrow." Develop a sense of a future-self if you want to accumulate wealth.

Fear-Based Choices

Fear and peer pressure also play a part in how people invest their money.
During stock market crashes, for example, many investors have reacted by selling off their shares -- a reaction based on fear rather than a thought-out choice based on long-term planning.

Deep in our brain sit two amygdalae, a tiny collection of cells that get activated when we're afraid. This can presumably keep you safe, giving you a momentary rush of panic that alerts you to run from an approaching tiger. But it can also prompt you to dump your investments in a panic.

Peer pressure also plays a role. When all the investors are selling, there is peer pressure to sell—even though the decision might not be wisest. Gregory Burns, a neuroscientist, found that "standing alone" versus "conformity to the group" triggered the brain's amygdalae and caudate, areas typically activated during physical or emotional pain.

So, it is less painful to go along with the herd and be part of a group of investors. Humans find comfort in making group decisions rather than on-my-own type decisions.

Poorly Served By Greed

Neuroeconomics and neuromarketing are emerging and exciting fields. But they don't explain the spirit behind deep human emotions and experiences such as exhilaration, disappointment or greed. At the end, we all know that greed and addiction serve us little, and self-reliance and honesty are assets that are honorable and worthy.

Perhaps awareness in our relationship with money can open our eyes to self-growth and wisdom. We can all take a little advice from William Shakespeare: "Love all, trust a few, do wrong to none."

Edited by: Lawyer Asad