This is the second part in a series on Neuroscience. The first blog entry discussed that the two major parts of our brain that are involved in financial decisions are the amygdala (where emotions such as fear, greed, and impulsive behavior originate) and the prefrontal cortex (where rational decision making and logical thinking reside).
So how do the amygdala and the prefrontal cortex impact your decisions involving money? In a huge way! Your amygdala is what causes you to panic if the stock market goes into a downward spiral. If you are likely to be impulsive and sell your investments in a panic, then your amygdala is being dominant in your decision-making process. If you tend to overanalyze your investments to the point where you feel paralyzed and cannot make a decision, then your prefrontal cortex is being dominant.
Neuroscientist Richard Davidson (from the University of Wisconsin at Madison) has conducted research that shows that the left prefrontal cortex can actually calm down your emotions and allow rational thinking to prevail. He determined that the left prefrontal cortex sends inhibitory signals via the white matter (axons that connect one neuron to another) to the amygdala. These inhibitory signals tell the amygdala to “quiet down,” allowing the brain to recover from an upsetting or emotional experience. His research showed that some people have more white matter between their prefrontal cortex and their amygdala than others, and those people are more resilient.
A person would want plenty of white matter between their prefrontal cortex and amygdala so the calming down can occur (and so financial decisions are not made impulsively). Not everyone has a significant amount of white matter (which may be apparent by how impulsive or fearful a person is), but Davidson’s research shows that people can actually increase their amount of white matter.
When making financial decisions, a wise approach is to be aware that the amygdala and prefrontal cortex portions of your brain may be in conflict with each other. If you suspect your amygdala is dominant and you have a tendency to make impulsive financial decisions that are detrimental to your financial security, try some of the strategies shown in “A Balanced Approach” (which is provided in the next blog entry).
Conversely, if you tend to overanalyze your financial decisions, ask yourself occasionally what your gut feeling is regarding a decision, and pay attention to your intuition. The amygdala and prefrontal cortex can both be helpful for making wise financial decisions. You just need to keep them in check and not allow one or the other to be overly dominant.
Photo by: Tax Credits
