Sound personal finance is more about mind than it is about math. You’ve heard me preach this before. Success with money requires more than just knowing that compound interest is a marvelous thing — it requires mastering impulses. Behavioral scientists at Stanford and Carnegie Mellon Universities have now actually observed this phenomenon at work in the brain. John Tierney, writing in The New York Times, explores recent research into behavioral finance.

“We were frankly shocked at how clear the results were,” said Brian Knutson, the Stanford psychologist who led the experiment. “It was amazing to be able to see brain activity seconds before a decision and predict whether the person would [buy] or not.”

That’s right: your mind might be playing tricks on you. Researchers have discovered two mental responses that may contribute to overspending.

  1. The nucleus accumbens, “a region of the brain with dopamine receptors that are activated when you experience or anticipate something pleasant”, reacts when you encounter something that you want to buy. In natural spendthrifts, however, the nucleus accumbens responds more strongly than in tightwads.
  2. The insula is normally activated when you encounter something unpleasant. Like high prices. But in a spendthrift, the insula reacts weakly.

This helps to explain why it’s easier for some people to accumulate huge credit card debts than for others. Or, as one researcher notes, why all-you-can-eat buffets are so popular. We like to think we’re getting something for nothing. Or at least for very little.

This research also sheds light on the mysterious nature of my own financial struggles: I knew that accumulating credit card debt was bad — I understood the math — but I had trouble stopping myself. I know it makes more sense mathematically to pay high-interest debt first, but I’m much more successful with the debt snowball method, which provides immediate psychological payoffs. Tierney writes:

Behavioral economists think tightwads aren’t any more rational than spendthrifts, because neither group is carefully weighing the long-term benefits of a Foreman grill versus college tuition. Dr. Loewenstein says the brain scans demonstrate that both kinds of shoppers are guided by instant emotions.

But beware! Just because scientists know why a behavior exists does not justify it. None of this should be construed to endorse poor money habits. It merely helps explain them. No matter what the cause of your financial problems, you must take responsibility for correcting the situation. You are in control of your financial destiny.

It’s simply a case of mind over matter. (Or, in this case, mind over mind.)

[The New York Times: The voices in my head say 'buy it!' Why argue?, via six different readers!]

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