Money and Your MindOctober 17, 2017
- Our emotions can derail us from making thoughtful decisions about money and investing.
- Market gains and losses can trigger responses in our brain that keep us from acting logically.
- Understanding how our brains react can help maintain a disciplined investment strategy.
Can you recall making a decision—good or bad—and later wondering what motivated you to make that choice? Over the years, researchers from the fields of neuroscience, economics, and psychology have identified why our brains sometimes can unwittingly stop us from making sound investment decisions.
If you’ve ever felt nervous watching the price of an investment fall, the part of your brain that responds to fear—your amygdala—may be to blame. The amygdala sends out warning signals, which can create a sense of anxiety when we fear something, such as anticipating or experiencing a financial loss.
On the other hand, positive outcomes can trigger certain neurons in the brain to release dopamine, a neurotransmitter that regulates feelings of pleasure. Simply anticipating making money on an investment could cause your brain to release this chemical.
The prefrontal cortex can help counter the brain’s primal responses and guide our behavior as investors. In effect, the prefrontal cortex can help you concentrate, analyze concepts, and draw logical conclusions instead of simply reacting.
To increase your chances of success as an investor, understand that your brain's natural responses can influence your decisions regarding money. This knowledge can help your prefrontal cortex step in to help you make decisions based on established investment strategies—not emotions.
Source: Zweig, J. (July 11, 2017). Is Your Brain Wired for Wealth? Used with permission.
Third-party websites are provided solely for your convenience. T. Rowe Price is not responsible for the information contained in any third-party website.
- Keep yourself educated on the markets, investments, and financial planning topics.