Your Money & Your Brain by Jason Zweig looks at neuroeconomics, which is research using brain activity, economics, and behavioral psychology to study how we make decisions.
The main focal point is how the brain affects financial decisions but it’s obvious the material goes beyond money matters. It’s equal parts scary and impressive how much is going on behind the scenes in our brains unconsciously that we’re unaware of.
Here are some of my favorite highlights from the book I find myself using over and over again:
- There are two parts of your brain that make decisions — one is reflexive (instinctive and emotional) and one is conscious (more deliberate and logical). The reflexive system often responds before the conscious system realizes it was supposed to respond.
- The intuitive part of your brain is so laser focused on change it makes it difficult to focus on anything that remains constant.
- Money doesn’t buy happiness as far as the brain is concerned because the anticipation of a gain and then actually receiving said gain are processed differently in the brain. Getting exactly what you planned for doesn’t do much for excitement in your brain.
- Your brain consumes 20% of your oxygen and the calories you burn when you’re resting. So when you start to think heavily it can go into overdrive and wear you out.
- People begin to get confident in their predictive abilities when they think they’ve spotted a pattern even when they’re explicitly told events are random ahead of time.
- Your brain hates uncertainty so when it is confronted with difficult questions it tends to search out easier ones instead in terms it can understand.
- Our brains can re-live financial losses while we’re sleeping.
- The brain of a cocaine addict who is expecting to get a fix and someone looking to make money on their investments is virtually the same.
Quiz: This Is Your Brain on Money
May, 11 2018 www.schwab.com
The human brain is not a rational economic actor. When faced with uncertainty, even the best investing minds may throw good money after bad, sell at the first sign of trouble or make all manner of muddled financial decisions.
These flaws in our everyday decision-making, first chronicled in the 1970s by Israeli psychologists Daniel Kahneman and Amos Tversky, gave rise to the field known as behavioral economics, which aims to mitigate the effects of these embarrassing foibles by heightening our awareness of them.
