The human brain is a miraculously complex thing. Be it our social life, emotional wellbeing, or physical health. Every single action, thought, and feeling is linked directly to our brain. Money matters are no exception. So what exactly goes on in the brain when we Earn, Save, or Spend money?

The science of “Neuroeconomics” studies just this. The first foray into this subject was made in the 1990s. Subsequent studies and experiments brought to light some very interesting facts about how our brain processes money-related feelings and decisions.

The Urge to Spend:

A 2001 study conducted by the medical team at Harvard University made a startling revelation by comparing the MRI scans of two groups of people – drug addicts and normal people with no addictions. The study found that on offering cocaine to the addicts and money to the non-addicts, the MRI results were almost indistinguishable.

On encountering temptations, the nucleus accumbens releases the chemical dopamine, making one feel happy and motivated to spend. This dopamine surge activates the brain’s pleasure-points and suppresses rational thinking, often misleading you into making optimistically silly monetary decisions.

What’s worse, this feeling of euphoria can be addictive. So the next time you’re tempted to over-invest (because your risk paid off handsomely once) or indulge in leverage trading, take a minute to reflect and reassess.

The Science of Saving:

The area of the brain called the Prefrontal Cortex is your best friend when it comes to saving. It performs many vital functions like planning, self-awareness, solving complex problems, and more. It helps you make rational, logical decisions. When you decide to invest via SIPs (Systematic Investment Plans) and Mutual Funds or follow a clear budget plan for yourself, the prefrontal cortex kicks into high gear.

Often, the nucleus accumbens and prefrontal cortex are simultaneously activated when you are faced with a particularly difficult financial decision. At such times, other factors such as your inherent nature, external circumstances, and the urgency of the situation play a defining role in decision-making.

The Friend-in-Disguise:

The insula lies hidden under the layers of the brain tissue. Its anterior part especially plays a very important (and usually underrated) role when dealing with money. It is responsible for the feeling none of us want – anxiety, suspicion, anger, negativity. However, these very emotions can actually save you from making some very risky financial gambles. That feeling of uneasiness that creeps up your spine when offered schemes that seem too good to be true? That’s your anterior insula warning you.

An intriguing study by Researchers from Carnegie Mellon University, Stanford University, and MIT Sloan revealed that when a person spends money, the insula region of the brain lights up in MRI scans. Furthermore, there are times when the insula triggers actual physical pain – what we call “a pain in the gut” – when we spend excessively. So yes, spending can be literally painful.

The Fight-or-Flight Plight:

Stressful monetary situations such as being burdened by debt or bankruptcy can trigger a fight-or-flight response in your brain. At such times, the limbic system (consisting of four parts – the amygdala, the hypothalamus, the thalamus, and the hippocampus) is activated and sends commands to the body to be physically ready for action. It also orders the release of chemicals such as adrenaline and cortisol into the body, which will enable it to run. All this is a good thing – only if you are faced with a truly life-threatening situation.

However, frequent and uncontrollable panic over money confuses the brain into thinking it is a do-or-die situation every single time. This leads to the release of cortisol every time, but too much cortisol damages the hippocampus, which houses our long-term memory.

Continued and prolonged stress eventually leads to memory problems and difficulty in other mental tasks. Early investing and budget planning can relieve you of prolonged financial stress.

The Power is Yours!

Usually, a combination of these different parts of the brain works together when you are faced with a financial dilemma. Every part of your brain assesses the information you are feeding it and sends you signals accordingly. The ultimate veto power to decide which part of the brain you will side with lies entirely with you.

Another experiment related to the pain-in-the-gut one also revealed a fascinating truth: spending in cash hurts more than spending using plastic money or digital payment. Taking a cue from this, one can train oneself to not mindlessly swipe or click at every opportunity. Instead, imagine yourself handing over an equal amount of cash – it might curb your desire to spend, especially if it is an unnecessary expense.

With a little practice and awareness, you can learn to better understand your thoughts and emotions regarding money and become truly money-wise!

Sources:

https://www.forbes.com/2006/02/11/neuroeconomics-MRI-economics-cx_mh_money06_0214neuroeconomics.html?sh=2f50b0165380https://thedecisionlab.com/insights/consumer-insights/this-is-your-brain-on-money/
https://www.smithsonianmag.com/innovation/how-brains-make-money-53470249/
https://greatergood.berkeley.edu/article/item/how_money_changes_the_way_you_think_and_feel
https://www.nbcnews.com/better/lifestyle/how-train-your-brain-save-more-money-according-psychologists-ncna981881
https://healthcareweekly.com/gambling-psychology/
https://www.nytimes.com/2016/07/17/business/paying-with-cash-hurts-thats-also-why-it-feels-so-good.html
https://www.researchgate.net/publication/280711796_The_Pain_of_Paying

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.