Our personal finance are more linked to our brain than we think. Economics and neuroscience go hand in hand when it comes to explaining how we manage our savings, losses, gains, investments… We talk about the neurofinance. And how does it work? They enter our labyrinth cerebral to discover how emotions and thoughts They directly impact every financial choice. Let us not forget that our innate inclination is emotional, while rationality is an attribute that we have developed over time.
What is neurofinance?
“The neurofinance They mean going one step further in behavioral finance, which has already shown that human beings are much less rational than we think when it comes to financial decisions,” explains José Trecet, financial coach.
“Our brain includes an infinite number of mechanisms that make us act in ways impulsiveon the one hand, and misinterpret the information that comes to us thanks to cognitive biases.” And he explains: “For example, there is a confirmation bias according to which we remember and pay more attention to information that confirms what we already thought previously. “If you are thinking about buying a house and you are looking for opinions, it is easy to only look at those that push you to do so.”
And this is just one example of how biases affect our finances. “They also help make it so hard for us to save, because we prefer immediate gratification, or they make us buy compulsively.”
And this doesn’t just happen when trying to buy a house. When investing, buying or changing a car, renovating the house, investing or considering having a emergency fund, Neurofinance shows us that our brain plays a crucial role in making these decisions.
The importance of choosing the moment
The emotional burden is an element that is always present in decision-making, including financial ones, and although it cannot be eliminated from the equation, being aware of its influence is of great help. This is explained by BBVA Assent Management, where it is recalled that the Better decisions are made by thinking calmly. Hence the importance of choosing the best time when making decisions about our finances.
From Banco Santander’s simple finance blog they leave a question to reflect on. How many times have you thought out loud that you should start saving but haven’t been able to? “The answer is in our mind and its complex relationship with money.” And the blame does not point to a single place but rather emotional, psychological and social factors come into play that mix, sometimes creating a scenario that makes it difficult to consolidate effective savings habits.
What happens in the brain when we want to invest
From the Banco Santander blog they decipher what happens in our brain when we consider investing. And he compares it to a group of emotional superheroes, each with a role, who are activated at the same time. Thus, “the amygdala activates the alert for risks, such as when considering investing in shares of a new company. Then the prefrontal cortex analyzes the situation rationally. Meanwhile, the insula influences our risk aversion, focusing more on conservative options “.
Next, “the hippocampus records these economic events, forming memories that will influence future financial decisions, while the dopamine circuits motivate us to seek financial gratification. If luck is with us and we obtain profits, the reward system is activated, releasing dopamine. and generating satisfaction”. And a reflection: losses affect more than profits.
