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Smart People, Dumb Choices PDF Print E-mail
Written by John D. Buerger, CFP®   
Monday, 01 February 2010 21:18
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John BuergerWhy Do Smart People Make Dumb Choices With Their Money?

And What Can You Do About It?

I'll bet that you've made plenty of bad financial decisions!

Don't feel bad.  Everybody has made (many) more than one poor financial choice in their lives.  Most of us (yes, me included) have probably made enough truly boneheaded moves to make up for the rest of the planet's population.

We can't blame ignorance (although financial literacy is a huge problem).  In many cases we do know better, but screw up anyway.  We'll buy that overpriced stock right before the price plummets.  We'll purchase some new and really cool electronics device or article of clothing NEVER to use it or wear it.

What's up with all that?

It's just part of the human condition - we're all hardwired to make these kind of mistakes.

THREE BRAINS - A BRIEF REVIEW
CONFLICTS AND SPEED ISSUES
WHAT'S THE SOLUTION?

Three Brains - A Brief Review

The human species has evolved over tens of thousands of years.  Much of the way our brain functions was developed back in the pre-historic days of the hunter/gatherer.  Our cognitive circuitry has evolved out of our need to stay out of harms way, find food and shelter and regenerate our species.  When you look at your decisions today through the lens of this creature of the distant past trying to survive in the wild, it starts to make some sense.

The basic structure of the 21st century human brain is not all that different from that of it's distant predecessor  What is to follow is an overly simplified view, but it is the easiest to understand and explain how you're hard-wired to make dumb financial choices.

Essentially, there are three brains in your head (no wonder there's so much confusion - too many cooks in the kitchen).  Each brain has it's own job:

REPTILIAN BRAIN - This is the part of your brain closest to the brain stem.  It monitors your vital organs and sends impulses to these organ to keep them operating.  Your heart beats automatically.  Your lungs expand and contract without any conscious thought by you.  In fact, you cannot willfully stop your heart from beating, your lungs from breathing, your kidneys from processing or your liver from filtering.

It just happens - thanks to the reptilian brain.

MAMMALIAN BRAIN - Going out a little further from the brain stem brings you to the part of your gray matter that really drives you - your mammalian brain (sometimes referred to as your limbic system).  Not only will you find your emotional centers like the amygdala (chooses between "fight or flight") here, but most of the basic controls over your day to day actions.

If you're hungry, you seek out food.  If you're cold, you go in search of clothing, heat or both.  The mammalian brain monitors your internal body conditions and drives you through your external environment to find solutions for any problems - most of these solutions are instinctual or habitual in nature.  You still don't think about it, you just do it.

It is possible, however, to override these impulses (possible but not easy).

HUMANISTIC BRAIN - What I call the humanistic brain is considerably larger and more developed in the homo sapien than in any other creature on earth.  This is the part of your brain that is furthest from the brain stem in the frontal lobe areas of the cerebral cortex.  It is this logical, rational and "thinking" part of the brain that processes even more information, makes calculations and then formulates intentions - some of which are in alignment with the mammalian impulses, some of which are not.

Conflict and Speed Issues

Each of these brains operates at different speeds.  Where the raw computing power of the humanistic brain is much greater than that of the limbic system, it's a much slower processor.  The mammalian brain makes decisions 10-20 times faster than the data-crunching supercomputer in your cerebral cortex.

Those super-quick impulses from the limbic system are also a lot stronger.  They have to be because many of them were cultivated in life-or-death situations where fast and sure actions were the difference between catching dinner and becoming the dinner.

But what happens when one part of the brain makes a decision and the other part decides - after thinking about it for a bit - that a different choice is actually preferable?  Initially the mammalian brain wins because it has already made a decision and launched a response.  In the end, a war rages between the emotional circuitry and the logic board and - in more cases than not - the emotion center wins due to sheer firepower.

So even though you KNOW what the right thing is to do ... your habits and instincts will continually send impulses to do just the opposite.  Why?

Because THAT's how we're hard wired.

What's the Solution?

When it comes to making fewer stupid choices with your money, the solution has two parts: (1) know/learn the right decision for each financial situation and (2) find a way to short-circuit the mammalian brain - at least when it comes to making financial choices.

FINANCIAL LITERACY - Read as many books as you can.  Review articles.  Talk to experts.  Go to workshops.  Pay for the services of a fiduciary advisor.  Don't feel bad about getting help.  We don't teach this stuff in schools.  Your parents weren't taught it and therefore weren't qualified to teach you.  What you get from TV, magazines and websites (even this one) DOES have an agenda.  Get answers from multiple sources and figure out which ones are the truth.

YOUR VALUES - We talk about this a lot on this website, but your values are the key to short-circuiting all the emotional garbage that is sabotaging your financial success.  Using your emotions to make financial decisions - whether in choosing investments, shopping for clothes or any other choice you make with your money - is fiscal suicide.

Spending money feels good, right?  But that doesn't make it right for you or your family's financial future.

Your values - those things in life that are most important to you - DO carry an emotional charge with them, but it is a different kind of charge than the brief but powerful dopamine rush that is part of the "Thrill of Spending."  The clearer you are about what is most important to you, the easier it is to make choices that are in alignment with those values.

Your mammalian brain doesn't want to self-destruct.  It wants to protect you from harm and satisfy you in as many ways as possible.  You're hard-wired to think that a dopamine rush is the most satisfying thing around so your brain keeps looking for ways to deliver it.  But if you spend time thinking about other things that are more important, more powerful to you (like being with family or following your passions, etc), and especially if you can articulate how these values are more important than a "retail therapy fix," your mammalian brain will (slowly) change it's priorities.

You'll get more of what's important to you and stop spending money, time and energy in pursuit of stuff that doesn't matter.

We'll never completely get rid of those bone-headed decisions.  There is too much anthropologic history there to completely eliminate screwing up.  After all, we're all human and making mistakes is an ingrained part of the human condition.  But the more you make financial choices that are in alignment with your highest, most powerful values, the more you will find yourself enjoying a rich and fulfilling life ... every day!

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Last Updated on Tuesday, 02 February 2010 07:43