The Psychology of Money
New Research Shows How Finances Affect Your Health
New research reveals that losing money causes headaches. Plus, optimistic people take more risks. Here's how the psychology of money plays out in life.
Humans are preoccupied with money. Making money, losing money, gambling money, saving money for retirement (or a boat, car, house, vacation) – the psychology of money permeates our lives.
From the day we start getting an allowance from our parents, we’re affected by the psychology of money. Here are the findings of two new research studies about money, and how finances affect our health. Financial pain may not be a myth after all.
The Psychology of Money: Losing Money Gives You a Headache
Losing money activates fear and pain in the brain, according to Dr Ben Seymour from the Wellcome Trust Centre for Neuroimaging at University College in London. When research participants lost money through gambling, the area in their brains normally associated with fear and pain was triggered. The same region allows the brain to predict imminent danger and activates defensive actions – leading Dr Seymour to conclude that there’s biological truth behind the clichéd phrase “financial pain.”
The brain’s ancient evolutionary system of motivation, fear, and pain has been hijacked by contemporary financial losses and gains. That is, we want to avoid losing money the same way we want to avoid experiencing pain because fiscal loss and physical pain are connected in our brains. Even just anticipating or thinking about losing money activates that region of our brains (the striatum). This is the psychology of money – or more accurately, the physiology of money.
Taking it a step further, Dr Seymour believes that studying the brain’s ability to predict and manage financial losses may provide insights into why some people gamble more than others. Understanding the psychology of losing money may even lead to new ways of treating gambling addictions.
The Psychology of Money: The Power and Pitfalls of Positive Thinking
Optimistic people are financially savvy, but a research study about money shows that too much optimism can lead to financial failure. Extremely optimistic people tend to have short planning horizons and can make foolish money decisions.
“The differences between optimists and extreme optimists are remarkable, and suggest that over-optimism, like overconfidence, may in fact lead to behaviors that are unwise,” says Dr Puri. When Duke University professors Manju Puri and David Robinson compared optimists and extreme optimists, they found that small doses of optimism can lead to wise financial decisions. However, extreme optimists may make irresponsible money moves and lose money.
How do you know if you’re an extreme optimist? Bank balance aside, extreme optimists tend to work fewer hours, save less money, are less likely to pay off their credit card balances regularly, and have a higher proportion of individual stocks in their portfolios. Extreme optimists are also more likely to be day traders. Run-of-the-mill optimists, on the other hand, work longer hours, believe their income will grow over the next five years, plan to retire later or not at all, and save more money.
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