All Things Financial Planning Blog

What is Really Driving Your Financial Decisions?

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A brain scan was taken just before an individual placed a stock trade. Another brain scan was taken just before someone was given a hit of cocaine. In both cases, the brain was flaring up in anticipation of a gain, and the scans were virtually indistinguishable.

Contrary to what we like to believe, decisions are made with the right side of our brains. This statement is controversial because we generally believe that we are rational people and make most decisions after an objective evaluation.

With respect to our financial decisions, this is even more controversial because as soon as we hear the word “finance,” our left brain springs into action. We have conditioned ourselves to believe that finance and mathematics are inextricably linked, and therefore, we make our financial decisions based on rational thought. In reality, we frequently make decisions before we are consciously aware of them and then attempt to rationalize them before we act. We must not confuse this with rational thought.

The left side of our brain tells us the two scenarios outlined above are different, but our right brain can not tell the difference. The left brain tells us that drugs are bad, and making money is good. The right brain simply knows is that we are about to benefit from something.

One of the things that makes us human is the ability to engage in rational thought. Unfortunately, this often results in bouts of overconfidence in our ability to control our emotions.

The brain scans above outline this phenomenon perfectly. Through rational thought, we have the ability to control our urges by recognizing the inherent danger in certain situations. However, we often neglect to acknowledge that danger when it applies to money (or we greatly underweight it), as we are conditioned to believe we ought to pursue more of it.

We must also recognize the overpowering nature of our emotions in reverse. Rational thought would not have led to so many people’s decision to bail out of the market (or not rebalance their portfolios) in 2009. Rational thought would have prevented millions of homeowners from purchasing homes with little or no money down. Rational thought would result in everyone spending less than they earn and planning more for the inevitable uncertainties in life.

We can not change how we are biologically wired, but we can make consistently better decisions by simply acknowledging how and where they are actually made. Like the deterioration of our bodies as a result of cocaine, the pursuit of short-term financial gain can set us up for long-term financial ruin. We insulate ourselves from the dangers of drugs through avoidance. It would serve us well to do more of the same in our financial lives.

Joe PitzlJoe Pitzl, CFP®
Director of Financial Planning
Intelligent Financial Strategies, LLC
Edina, MN

Author: Joe Pitzl, CFP®

Joe Pitzl, CFP®, is the Director of Financial Planning at Intelligent Financial Strategies, a fee-only financial planning firm based in Edina, MN. He believes that money is a wonderful servant in life, but a horrible master. His mission is to help people manage and align their financial resources to serve their life’s purpose. Joe is a Certified Financial Planner™ professional and a graduate of the University of Wisconsin - Madison with a degree in Personal Finance. He is heavily involved in the Financial Planning Association as the National President of FPA NexGen. Joe also sits on the FPA’s Professional Development Advisory Group and the Editorial Board for Practice Management Solutions Magazine. He is also a past Board Member of the Financial Planning Association of Minnesota and is a regular contributor to the FPA’s All Things Financial Planning blog. Joe has appeared in numerous publications, including a nationally syndicated column through the Minneapolis Star Tribune titled, “Joe and Your Dough”, the Pioneer Press, Investment News, Financial Planning Solutions Magazine, Financial Planning Magazine, the Journal of Financial Planning and the Chicago Tribune. Outside of the office, Joe is an avid golfer, plays hockey and softball, has completed two marathons, and enjoys cooking and spending time at the lake with his wife, Becky.

2 thoughts on “What is Really Driving Your Financial Decisions?

  1. A lot of great points here. I completely agree that planning a financial future is sometimes hard but if we get the right mind set we can accomplish anything.

  2. Great insight Joe and it is amazing how our mind works especially when it comes to financial decisions and planning.

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