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Dollars & Sense

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Why smart people do stupid things with their money

Most people are generally intelligent, reasonable and knowledgeable, but if left to their own devices, they are capable of doing some really dumb things with their money. On occasion, this paradox has left me breathless. Have you ever wondered why it is so hard for people to learn from their own financial mistakes? Turns out that there is a new science that explores these questions and it can help us all discover how to keep emotions out of our financial decision-making. It’s called neuroeconomics.

Neuroeconomics is a hybrid of neuroscience and psychology. Its promise is to help crack the smart yet stupid riddle for the first time. By using the wonders of brain-imaging technology, scientists are able to get down to the biological bedrock of financial decisions. What scientists are discovering is that emotions are located in a more primitive part of the brain than rational thought.

Jason Zweig, expert and author of a new book on neuroeconomics, Your Money and Your Brain, gives us this example. When you unexpectedly lose money on an investment, a part of your brain called the insula becomes intensely active. The insula is one of the main centers in the brain for processing disgust; the neural response of someone who has just lost money is barely distinguishable from the activation in the brain of a person who has just smelled vomit or stepped in dog doo. It's literally a sickening feeling, and it creates an almost irresistible urge to get rid of the thing that made you sick. Being slaves to our emotions can lead us astray financially,

Read more at LifeAfter50.com

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