Anatomy of the Financially Savvy Brain is a 6 week series that will run every Thursday until April 7/11. The entire series can be found under Money Tips.
Ever wonder what is actually happening inside our brains as we plan our money management strategies, bravely stave off impulse spending , and work towards that end goal of financial freedom? This series will answer those very questions by looking at the seven main processes of the brain and how they effect our money management.
Last week we looked at the first process, the prefrontal cortex. This week we are going to look at the Amygdala.
2. Amygdala: The amygdala is associated with the processing of emotions. It is part of the limbic system in our brain. The amygdala is responsible for our fear responses and pleasure responses. It is often associated with the feeling of a high.
A financially savvy person has learned to train this part of the brain and control it. If we let our emotions run high, we are often led to impulsive and irrational behaviour. If we put this into the context of money management, an untamed amygdala could lead someone down a path of frivolous spending and bankruptcy. It would be like a junkie going back for another hit; it just feels so good that they can’t quit.
Here is another example. Lets say you might have a bad habit such as smoking and are consciously aware of the dangers. Your amygdala on the other hand has been trained (through perhaps years of repetition) that cigarettes are good for you and necessary when you are stressed or anxious. Therefore, the amygdala no longer senses the danger of smoking due to your persistent programming that “smoking is necessary” to keep you safe.
Now lets look at the reverse. The amygdala also controls our fear response and when left unchecked can hinder us in making a wise financial decision. Your human genetics are programmed to believe that change is bad. Logically, you could rationalize that if change was good it shouldn’t cause such negative emotions. By stopping you from changing, your human genetics are just doing their job of keeping you safe from whatever it perceives as danger.
For example, someone could be so afraid of losing their money that they may never invest it where it would have the chance to grow. Instead they put it under their matress because they know it is safe. The problem is, the money they have under the matress will never keep up with inflation and will be worth less in the future than if they had managed their fear and invested it.
A study done at the California Institute of Technology examined the fear people have of losing money and how the amygdala played a role. The study involved an examination of two patients whose amygdalae had been destroyed due to a very rare genetic disease; those patients, along with individuals without amygdala damage, volunteered to participate in a simple “experimental economics task.”
In the task, the subjects were asked whether or not they were willing to accept a variety of monetary gambles, each with a different possible gain or loss. For example, participants were asked whether they would take a gamble in which there was an equal probability they’d win $20 or lose $5 (a risk most people will choose to accept) and if they would take a 50/50 gamble to win $20 or lose $20 (a risk most people will not choose to accept). They were also asked if they’d take a 50/50 gamble on winning $20 or losing $15—a risk most people will reject, “even though the net expected outcome is positive,” Adolphs says.
Both of the amygdala-damaged patients took risky gambles much more often than subjects of the same age and education who had no amygdala damage. In fact, the first group showed no aversion to monetary loss whatsoever, in sharp contrast to the control subjects.
The conclusion was that the amygdala is responsible for triggering a sense of caution toward making gambles that you might lose. Therefore, a well trained amygdala can actually prevent us from making a bad money decision.
So, how do you train your amygdala to work in your favour?
The difference between achieving success or experiencing failure when it comes to your finances is that successful people learn how to overcome their human genetics to change and grow, accept the uneasy feelings and push themselves beyond the urge to stop.
So, there you have it; the breakdown of the second brain process that plays a role in your financial success. Stay tuned next week where I discuss the third process, the Hippocampus.
So what have you learned about your amygdala? Is it working in your favour?