Neuroscience is defined by Merriam-Webster as “a branch of the life sciences that deals with the anatomy, physiology, biochemistry, or molecular biology of nerves and nervous tissue and especially with their relation to behavior and learning.” A much shorter definition is simply the study of the brain. Although neuroscience originally resided within the field of biology, it now includes researchers from psychology, medicine, chemistry, philosophy, and education. In addition, new fields, such as neuroeconomics and behavioral finance, have evolved as a way to interpret how we make financial decisions.
There are many different parts of the brain, but two distinct parts are involved in financial decisions. The first part involves the amygdala. It lies within the limbic system, which is often called the reflexive brain, the reptilian brain, or the lizard brain. It is in the core of the brain, and it processes information very rapidly and often subconsciously. The amygdala is considered a major center within the brain where our intuition, emotions, perception of risk or reward, and first impressions originate. The amygdala causes us to seek rewards (sometimes crave rewards) such as sex, money, alcohol, and drugs. Impulsive behavior originates in the amygdala, along with anger, fear, and greed. All mammals have an amygdala, and it plays a crucial role in our survival. When you are about to step on a snake, when a dog runs in front of your car, or when you see an object coming toward your face, it is the amygdala that causes you to avoid the snake, hit the brakes, or duck.
The second part of our brain involved in financial decisions is the prefrontal cortex, which lies behind the forehead and is often called the “reflective” brain. This is where analysis, weighing the pros and cons of an idea, and formulating a plan originate. The human brain has evolved with a larger prefrontal cortex than animals, which is what allows humans to think rationally.
Psychologist Kelly McGonigal states in her book The Willpower Instinct that this is “one reason you’ll never see your dog saving kibble for retirement.”
The next blog entry will explain how the amygdala and the prefrontal cortex play a role in our financial decisions.
