How are brains and money connected? Economists have considered money from every angle for ages, but the research field of neuroeconomics is relatively new. Neuroeconomics studies how humans make decisions using brain activity, economics, and psychology. Researchers use MRI to figure out what happens biologically when people make financial decisions. As it turns out, brains and money are connected on the deepest levels. While some findings were accurately predicted by researchers, others came as a surprise. However, all lend valuable insight into why people make certain decisions when it comes to managing their money.
According to one study, playing games involving money stimulates the reward center of the brain. MRIs of test subjects were indistinguishable from those of people high on cocaine.
Researcher Brian Knutson explained, “Nothing had an effect on people like money – not naked bodies, nor corpses. It got people riled up. Like food provides motivation for dogs, money provides it for people.”
Everyone knows at least one adrenaline junkie — the person who prefers skydiving and bungee jumping to reading or playing golf. However, the term “risk-taker” also describes people who take intellectual risks. Those who gamble with their finances in hopes of a big payoff. Risk applies to activities like gambling. But but the word also describes choosing higher risk investment opportunities.
Researchers at Stanford wanted to understand and predict why some investors engage in riskier financial behavior. They found that measuring activity or stimulation in reward circuitry of the brain predicted which investors would opt for less risk. Researchers could also predict which investors would opt for a riskier stock. Without fail, test subjects with higher levels of reward center activity consistently opted for riskier investments. Imagine, scientists can predict where you will put your money by studying your brain scans and blood work.
ThinkAlike Labs studied subjects attached to EEG machines while they evaluated common financial scenarios. The subjects considered purchasing a home, saving for college, budgeting, planning for retirement. The experiment asked subjects to make decisions with and without help. Researchers recorded the brainwaves of each test subject during the decision-making process. They wanted to determine just how brains and money are connected.
The results were very consistent. The human brain is 21% more relaxed when it has help in making financial decisions. In addition, having assistance boosted test subjects’ recognition and understanding of crucial concepts by 28%. Without help, it took subjects 20% more effort to focus during testing. The conclusion? Everyone, even financial experts benefits from some help in making financial decisions. Investors may be doing themselves a favor by seeking financial advice or direction.
Financial winnings produce a euphoric feeling similar to intense love, while losses stress the body. There is a particular connection to the digestive system. That stomach churning one feels when they have lost money is real. Researchers from Johns Hopkins Center for Neurogastroenterology have identified a significant relationship between gut and brain.
The emotional wiring area of the brain contains spindle cells, as does the human digestive system. So, when “gut instinct” tells you something negative about your investments, it is entirely possible your gut and brain spindle cells are firing in sync…and you should listen.
In Your Money and Your Brain, Jason Zweig shares:
In 1957, the average American earned about $10,000, adjusted for inflation. They lived without a dishwasher, clothes dryer, TV, or air conditioner. But 35% of people surveyed then said they were “very happy” with their lives. By 2004, personal income had nearly tripled after inflation, yet 34% of the people now said they were “very happy.”
Money doesn’t literally buy happiness. It’s true. Well, kind of true. Recent research shows that anticipation of money and what you imagine doing with it evokes larger brainwave response than receiving money does. It’s all about perspective.
So much can be learned from studying how brains and money are connected. Realizing how the brain responds during financial decision making can help advisors understand their investors better. Investors with that insight may find the investing process less taxing. While such decisions stress our minds and bodies, science is learning that getting help or advice reduces stress. And that knowledge may help us live happier, healthier, more profitable lives.
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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):
This is an updated version of an article originally published on June 6, 2018. It was recently edited by Maryan Pelland]
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Mercedes is a business owner and the Executive Consultant with Rodan + Fields. In addition, she works in the field of behavior analysis for children with autism and their families, specializing in preschool-aged children. She also has her Masters in Science from the University of California at Davis.
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