For Financial Success, Outsmart Your Brain

How’s this for a convincing excuse not to save for retirement? “I can’t help it. The human brain is programmed for financial failure.”

An estimated 80 percent of our decisions are made emotionally. Our brain is divided into three sections. The upper brain, or cerebral cortex, is where we reason. The middle brain, or limbic system, is where we react to emotional impulse. The lower brain, or basal ganglia, is what regulates the operations of the body.

The limbic system, where our emotions reside, functions to move us toward pleasure or away from danger. Feelings like fear or anger can cause us to move away from a perceived danger, while feelings of joy or pleasure can impel us toward a perceived benefit or reward.

That aspect of our brain serves us very well when it comes to physical danger or life-enhancing decisions like choosing a mate. It isn’t quite so much help when we need to make financial decisions.

Suppose you and your spouse are talking about spending $5,000 on a trip to the Bahamas. Your middle brain lights up. It sees you sitting on a beach, it feels the light breeze twirling your hair, it hears the sound of the waves rolling onto the sand, and it can practically taste the Piña Colada you’re sipping.

Suppose you’re discussing putting that $5,000 into an IRA instead. What does your limbic system see, hear, feel, or smell? You writing a check? A brokerage statement? There’s no particular pleasure response for your emotional brain to get excited about. No wonder it’s going to urge you away from the IRA and toward the trip to the Bahamas.

When we’re faced with decisions, the option with the greatest emotional payoff tends to win. This is how our brains are wired to make financial decisions in favor of our short-term pleasure rather than the delayed gratification that is in our long-term best interest.

The secret to overcoming that self-defeating programming is to give our limbic system something to get excited about that supports saving for the future. Successful savers and investors learn to link emotional rewards to their financial goals.

Let’s take another look at the choice between an immediate tropical vacation and putting money into an IRA. Someone committed to investing for the future may imagine the same tempting beach scene. What they do, however, is see it happening once a year, or even every day—in the future. They imagine themselves enjoying that beach as one of the rewards of saving for their financial independence.

It’s also possible to trick the limbic system with negative images. Another saver might vividly imagine herself as a bag lady, living out of garbage cans and sleeping on park benches, if she doesn’t write that check to her IRA. This isn’t nearly as much fun as imagining situations that reward investing, but it has the same effect of adding emotional impact to a financial decision.

In either case, the goal is to create an emotional charge from imagining the IRA contribution that is stronger than the image of spending the money today. The scene with the greatest emotional impact wins.

This is one reason it’s important for us to spend some time defining our life aspirations. Having clear images of what we want in the future makes it easier to imagine ourselves there. It helps us link strong emotional rewards to mundane activities like writing a check to an IRA.

The human brain may be programmed for financial failure, but we have the ability to change that programming. With a little effort, we can rewire our brains for financial success.

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5 Responses to For Financial Success, Outsmart Your Brain

  1. Bobbie Munroe February 20, 2012 at 10:13 am #

    I hope a lot of people read this as this is fantastic, practical information for rewiring your brain toward the better decision. Such techniques can be used for a variety of things. For instance, I am thinking about moving back to North Florida. This will mean I will have to leave the house I built 25 years ago and improved steadily since then, a place my friends call “Bobbieville.” This will be hard for me. But instead of focusing on the loss, I am building wonderful images around the new life, especially the house I will get to build (something I love to think about). I have to admit that when I walked into the current house last night after days away at a conference, I experienced a sharp pang that this might be one of the last times I returned “home” to this place. But I was able to shift quickly to the thoughts of the new, exciting life ahead of me. I also realzied that anywhere my dog and cats were would be home:-)

  2. Richard Trachtman February 24, 2012 at 6:13 am #

    Your new photo is terrific.
    As for my thoughts on your article, I would say that, in general, postive reinforcement is more effective than negative. I don’t think trying to think about one’s self as a bag lady is a good idea. Too many women do this and it undermines happpiness.

    When it comes to choosing a mate the limbic system does serve us well by telling us what gives us pleasure. But choosing a mate without engaging the upper brain happens too frequently and is a bad idea which results in many divorces. Choosing a mate is at least as big a financial decission as planning for retirement. One really needs to think about issues of financial compatibility such as attitudes toward spending ans saving, who should support whom, How much debt should come into a marriage, who gets to decide how money will be spent, etc. before deciding to tie the knot. Divorces, especially when there are children to support,can really undermine one’s abiity to save for the future.


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