I’ve blogged a few times in the previous months about my recent fascination with the subject of “neuroeconomics”. This is a field of study that looks at the role a person’s pschye, emotions, and/or subjective-self plays in making economic decisions. I’m fascinated by this subject because of the gap between the body of fiscal knowledge that is readily available to households and the widespread lack of financial health. I used to believe that the primary reason for this gap was a lack of significant fiscal curriculum in our schools. The idea being that people were never taught how to properly manage their finances and therefore didn’t practice healthy habits. I still believe that our society could benefit from better education but I now recognize that the issue isn’t necessarily knowledge-based.
The reality is that most households know they should spend less than they make so that they can save for future needs (i.e. retirement, rainy day fund, etc.). Furthermore, most households have a desire to put their financial lives in order. The problem is not knowledge it is pschological. As Jason Zweig points out in his book “Your Money & Your Brain” the human brain has evolved over millions of years and only in very recent history has it been exposed to rational, analytical reasoning. It’s no wonder that despite our understanding of concepts it is still very difficult for us to put theory into practice. Here is an excerpt:
“…our investing brains often drive us to do things that make no logical sense-but make perfect emotional sense….Our brains were originally designed to get more of whatever would improve our odds of survival and to avoid whatever would worsen the odds. Emotional circuits deep in our brains make us instinctively crave whatever feels likely to be rewarding- and shun whatever seems liable to be risky….That’s why knowing the right answer, and doing the right thing, are very different.“
I look forward to completing this book and gaining a greater understanding of the biology of how decisions are made. I plan to share other thoughts and excerpts over the course of the next few weeks so please stay tuned. If you have any interesting thoughts or resources to share on this subject please do so below in the comment section.