The cerebrum is literally divided into two sections. The right section, or right brain, lives in the present. It recognizes the moment, taking in all sorts of sensory and anecdotal data. It uses parallel processing to simultaneously process incoming stimuli and see the big picture. Its actions are intuitive, contextual, reflexive, and non-linear. It is easily distracted, loses focus, and is all about the richness of the experience.
The left brain lives in all the time dimensions: past, present, and future. It reflects on connecting the present with the past and future by analyzing data. It uses serial processing to focus and stay on track. Its actions are logical, sequential, and linear. It is task, goal, and detail oriented which limits its perrspective.
A third area of our brain is the limbic system, the lower or reptilian brain.
When things are working well with our brain, the right brain recognizes data and sends it to the left brain, which reflects and analyses it and devises a response. Things go awry when, due to fear, stress, or other factors, the left brain is unable to accept messages from the right brain, and visa versa. This leaves the reactive reptilian brain to dominate the response process, and we make our decisions based on fear, hurt, anxiety, or anger. The result is often poor financial decisions.
Sound money decisions are often, but not always, straightforward and unforgiving. Similar to math, they have a high probability of being either “right” or “wrong.” For example, a good money decision would be to commit to saving for retirement and future needs before deciding how much we can afford to spend on clothing, shelter, and lifestyle. This is probably the choice we would make if we fully involved our logical, analytical left brain.
Much of traditional economic theory is based on the assumption that we do make money decisions with our left brains fully engaged. Yet this isn’t how many of us make those decisions. Instead, we often act on impulse or in response to fear, making financial choices emotionally even when they do not serve us well. Researchers tell us that 80% of our responses are made in our right brains.
To make the best financial decisions, we need to “tame the lizard,” or keep our reptilian brain calm in the presence of a perceived financial threat so it does not shut down our cerebrum. Then the right brain can recognize data, the left brain can reflect and analyze the data, and the response is a reasoned one that is in our own best interests.
It is possible to learn how to overcome the involuntary responses of our brains to perceived threats, including financial ones. Next week we’ll discuss some of the ways to do this.