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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.
- 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.
- 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!]
This article is about News, Psychology, Shopping Thursday, 25th January 2007 (by J.D. Roth)
January 25th, 2007 at 7:38 am
Hmmm…the next informercial topic…the get rich quick pill. Just take this magical substance before you visit your local mall, and you won’t want to spend a thing!
Very interesting post. I wonder if this behavior is hereditary, learned, or a combination? Are we pre-disposed to spend/save?
January 25th, 2007 at 7:46 am
I wonder if this behavior is hereditary, learned, or a combination? Are we pre-disposed to spend/save?
This is a great question, of course. I think the answer is: “it’s a little of each”. While the research in this article indicates that their are physiological responses to money, I do not believe this comes anywhere close to accounting for the whole answer.
For my part, I know that many of my money habits are learned. My parents modeled poor financial skills, and I learned them quite readily. The fact that my brain is all-to-happy to reinforce these poor behaviors simply exacerbates the problem.
I almost think the fact that there’s a biological component to this behavior makes it more important to consciously cope with the money, to be mindful about spending. The article sort of downplays rational money decisions, yet I think that learning to make smart choices goes a long way to overcoming the brain’s natural responses.
January 25th, 2007 at 7:54 am
[...] Turns out that there are some very interesting reasons why some people spend money impulsively while others do not. Looks like the cause is actually in your brain! [...]
January 25th, 2007 at 8:21 am
“While the research in this article indicates that their are physiological responses to money, I do not believe this comes anywhere close to accounting for the whole answer. For my part, I know that many of my money habits are learned.”
Keep in mind that just because it’s physiological it doesn’t mean it’s not learned, or that it can’t be altered! There are lots of examples in neuroscience of these types of reward-associated responses being completely learned - they can be triggered by things like a bell that always precedes your being given a piece of cake, for example. They can also be affected by attention - if you are exposed to a situation that has some things you associate with good outcomes and some associated with poor outcomes, anything that affects which of these things you focus on (be it an outside intervention like a verbal reminder, a spotlight on part of the scene, or just habit) will affect the response, too.
Point being: if you consciously force yourself to think “yes, but, my goodness this cost is huge - think of all I’ll be giving up to buy it! Think of the empty checking account! Think of the stress and worry of being potentially short of cash, and what that does to my marriage! But, think how good I’ll feel to have made it home with my financial state intact!” …even if it feels weird at first and takes a while to sink into your basic automatic thought patterns, it will in the end start to affect things like the responses being discussed here.
- Your Friendly Neighborhood Neuroscientist
January 25th, 2007 at 8:48 am
I wonder if spendthrifts have taught themselves to think twice before you act on these neurological patterns.
Interesting post.
January 25th, 2007 at 9:21 am
I know this is a personal finance blog and not a cognitive science blog, but I find the distinction J.D. and others make between “what happens in your brain” and “you” to be absolutely fascinating.
I know that most people are inclined to see a distinction between the two, and that influences how they approach problems like spending vs. savings - “I just can’t control myself!” for example. The inability to save money is seen as a struggle between two factions, only one of which is considered to be “me” - “Me” vs. “my impulsiveness”.
But one of the findings of cognitive science is that consciousness and the body (which includes the brain) aren’t two separate things. Daniel Dennett has written about this for years, among others; and I’m in the middle of the book “Philosophy in the Flesh” by George Lakoff and Mark Johnson which talks about this, too.
I guess the point I’m trying to bring is this: it’s easier to manage one’s impulses if one can integrate those into one’s idea of ones’ self, I believe. We only use the metaphor of “struggle” because we’re pushing the impulse out of our identity.
Wow, sorry if this is incoherent. The English language doesn’t do a very good job of helping me describe all this…
At any rate, thanks J.D. for the article. Definitely interesting to me for both science-y and personal-finance-y reasons!
January 25th, 2007 at 11:48 am
I have much experience with the psychology of spending along the course of learning to live with bipolar disorder. Luckily, nearly all of my impulsive purchases was somewhat useful (many computer books, coffee, office supplies, etc…) and I’ve made them work one way or the other.
What ultimately led me to be able to handle my condition, and I think would also work wonderfully for financial problems, is something like cognitive behavioral therapy. All of us find ways to justify our behavior, even if subconsciously. But most people never notice the little devil constantly on their shoulder giving them the bad advice.
The goal is to learn to catch, identify, and ultimately deal with the precursor thoughts and feelings that lead to the problems. You would be amazed at just how much we actually try to hide from ourselves in order to justify our behaviors.
January 26th, 2007 at 7:11 am
[...] Inside the Mind of a Spendthrift - J.D. continues his message that sound personal finances are more mind than math which I believe as well. [...]