Your Brain and Money

Your Brain and Money
By Steven Pomeranz

 

As many of you know, I find - quite fascinating - the connection between money and our brains, and how we make decisions that involve money in our daily lives - our investments, our "lendings" and borrowings, issues of trust on financial matters, etc.

So I recently came across an article in Forbes magazine that was titled This Is Your Brain On Money by Matthew Herper, and thought I'd share it with you.

So, the article starts out with an interesting story about how a Stanford trained scientist named Brian Knutson accidentally set neuroscience and economics on a collision course about a decade ago. Knutson simply wanted to understand how our brains reacted to intense emotions. So he got a bunch of volunteers and set about conducting a series of experiments where he hooked their brains up to MRI scanners and showed the subjects what he thought were images that would draw out intense emotion... nude photographs, gory images of decapitated bodies, etc. And, as it happened, he also showed them a couple of images on money, just by chance... even though money wasn't even remotely on his radar as something that would evoke more intense emotion than a Playboy centerspread.

But, much to this researcher's surprise, his MRI scanners picked up far, far greater activity when our brains were shown money or things related to it and MRI scans of those nudes paled by comparison... and this led a shocked Brian Knutson to conduct a few more experiments - with just money - to make sure his MRI was not recording false readings. And nope... the MRI wasn't giving false readings... so he then published his findings... to much reaction... and inadvertently kicked off a new field of research called Neuroeconomics. Oh, and by the way, he obviously wasn't hooking up any 13 year old boys!

Okay... since Brian's early research, there's been intense excitement and experimentation in Neuroeconomics with researchers devising new experiments every day to get a better sense of how our brain responds and reacts to economic issues - of money, financial trust, attitudes to gains and losses, attitudes to knowns and unknowns, and so on.

As Knutson sees it, these experiments give us a glimpse of what goes on in that black box we all carry on top of our heads... and have upended a few long held beliefs while shedding new light on this subject.

For example, economists traditionally believed that money was simply a means to an end, something that we used to buy the stuff that really excited us, and never imagined the primal impact that money has on our brains.

But researchers found that offers of cash and the opportunity to make easy money caused a surge of dopamine in our brains... dopamine is a Neurosubstance that's strongly linked to addiction... and conjectured that money could in some way be addictive. They also found that people experienced intense immediate pleasure or pain from gaining or losing money.

And as more scientists got involved, they devised even more clever experiments to see how our brains react to economic situations. For example, one set of researchers setup experiments to understand why investors tend to be wary of investing outside their home countries. What they found, through some clever experiments, was that people tend to irrationally favor markets that they think they know and shy away from markets that they have little knowledge of... even when those markets were clearly explained to them including suggestions that they'd almost certainly make more money abroad... yet, irrationality prevailed... so much for all those theories MBAs are taught that investors are always rational!

In yet another experiment, designed to understand how we trust people with money, researchers had investors hand money over to a trustee multiple times, with multiple performance and repayment scenarios, and essentially found that different parts of the brain lit up when subjects were interacting with a trustee... and what is unbelievably surprising is the finding that investors handed more money to trustees even when they had suffered negative consequences... rather than handing more money to successful trustees. Doesn't this seem entirely counter-intuitive?

So - while there are no concrete takeaways from this - it's clear that many of our financial decisions are not driven solely by logic... and I think it's fascinating that a field such as Neuroeconomics is beginning to give us some insights on how our brain reacts to money, -investing, -handing money over for investments, and so on.

And, of course, as with all scientific research, skeptics abound. -Those who believe that life is a lot more complex and that our attitudes toward money cannot be derived from simplistic experiments. These skeptics may have a point, but this is a young field of research and could well deliver even more fascinating insights in time.

It makes me wonder if the world's next richest man could be one of those mad scientists who finally figures out how to control our brains on money matters... let's hope not!

Steve Pomeranz is a Managing Director for United Capital Financial Advisers, LLC, "United Capital", and owner of On The Money. On The Money is not affiliated with United Capital.