Money Anxiety (eBook)

Dan Geller (Autor)

eBook Download: EPUB

2014 | 1. Auflage
175 Seiten
First Edition Design Publishing (Verlag)
978-1-62287-477-4 (ISBN)

Infos

This is a behavioral economics book showing readers how money anxiety impacts consumer financial behavior and the economy. The book demonstrates the impact of financial anxiety on retail sales and bank savings. When money anxiety increases, consumers save more and spend less, which pushes the economy into a recession. Conversely, when money anxiety decreases, consumers save less and spend more, which expands the economy.

Textauszug

Chapter One

 

Physiology, Psychology and Behavioralogy

 

Humans are creatures of habit, and for a good reason—we were “programmed” to be so as a means of survival. Survival is the strongest and most permanent feature of our being, linking our physiological, psychological and behavioral elements into a survival “machine”. Throughout our evolution, we have encountered experiences that shaped our physiology, and in this case, our brain neurology. This means that the way our ancestors reacted to the danger of facing a tiger is the same reaction we use today when we face financial and economic danger. As a matter of fact, the same brain function that enacted the fight-or-flight reaction when our ancestors faced a tiger is responsible for producing our reactions to varying economic and financial conditions. Of course, the dangers of the past, which were immediate and fatal, are different from today’s economics dangers, but the function of the brain that is responsible for protecting our survival does not know the difference.

During my many years of researching the topic of financial behavior I could clearly see empirical evidence of the existence of financial anxiety. I could clearly see from my analysis how the behavior and financial decisions of consumers change with varying economic conditions, but the missing part was: why? In other words, I knew that financial anxiety exists and I could see its impact empirically, but I was missing the scientific reasons for such behavior. The answers came gradually, by reading research and books by some of the leaders in the field of behavioral economics, psychology and neuroscience. I will refer to their work throughout this book to substantiate the concepts I am presenting on behavioralogy and its impact on the economy.

What is financial behavior? I would argue that it is not a stand-alone function of humans operating in a vacuum, but is the result of a specific process. In this chapter we are going to look at the process that leads to financial behavior, and the reasons we make different financial decisions according to varying economic conditions. The starting point of financial behavior, and for that matter any behavior, is our physiology or more precisely, our brain structure. Any decision we make that leads to behavior stems from our brain. Yes, even our most instinctive behavior, which we tend to think of as “gut reaction”, actually originates in the brain. Once a neurological process takes place in the brain, or in some part of it as we will soon see, the process of our psychological and behavioral mode acts like a chain reaction.

 

Instinct, Emotion and Intellect

Let’s step back and take a general look at how our brain functions in relation to decision-making and behavior. Clearly, the scope of this book is not neuroscience, but it is important to understand the role each of the three main parts of the brain plays in our decision-making process and ultimately our behavior. I found an excellent and clear description of the three main brain parts and their functions in the work of Deepak Chopra, M.D. and Rudolph E. Tanzi, Ph.D. in their latest book Super Brain. According to Chopra and Tanzi, the human brain has three main parts: the reptilian brain, the limbic system and the neocortex. Each of the three main parts of the human brain was formed during different times in our evolution and each part is responsible for different human functions, and therefore, behavior. In their book Super Brain, Chopra and Tanzi describe the functionality of each of the three brain parts as follows: “In the triune (three-part) model of the brain, the oldest part is the reptilian brain, or brain stem, designed for survival. It houses vital control centers for breathing, swallowing, and heartbeat, among other things. It also prompts hunger, sex, and the fight- or-flight response.” As we will see in the proceeding chapters, the reptilian part of the brain is the origin of our instinctive behavior when we respond to real or perceived financial danger. For simplicity and clarity, I will refer to the reptilian brain as the instinctive brain.

The second main part of the brain is the limbic system, which was next to evolve. According to Chopra and Tanzi, “it houses the emotional brain and short-term memory. Emotions based on fear and desire evolved to serve the instinctive drives of the reptilian brain.” Here, again, we will see later how our emotions stemming from the limbic system, affect our behavior during various times of financial uncertainty. I will refer to the limbic system part of the brain as the emotional brain.

And finally, the third main part of our brain, and our most recent addition to the brain, is the neocortex, which according to Chopra and Tanzi “is the region for intellect, decision making, and higher reasoning. As our reptilian and limbic brains drive us to do what we need to do to survive, the neocortex represents the intelligence to achieve our goals while also placing restraints on our emotions and instinctive impulses.” Clearly, the neocortex is what distinguishes humans from other species because it provides us with the intellectual capacity to reason, and it acts as a balancing agent to our instinctive or emotional reaction to financial situations. I will refer to the neocortex function of the brain as the intellectual brain.

In Chopra and Tanzi’s description of the three functions of the brain, I am stressing the key words that explain the link between each particular function of the brain and our financial behavior. For example, our instinctive fight-or-flight response originates in the reptilian part; our emotional response originates in our limbic system and our intellect comes from our neocortex function of the brain. A very important aspect of this brain research is the role that our intellectual function of the brain plays in “balancing” the tendency of our instinctive or emotional brain functions when reacting implosively or emotionally to economic conditions. Yet, as we will see later, in many cases our instinctive and/or emotional functions get the upper hand in the fight for control over decisions on financial matters.

 

Fast and Slow Thinking

The connection between our brain physiology and our heuristic process is key to our understanding of financial behavior. Heuristic is a process of decision making based on our past experiences, which is also the source of our intuition. Heuristic methods are used to speed up the process of finding solutions through mental shortcuts to ease the cognitive load of making a decision. Examples of the heuristic process include using a rule of thumb or an educated guess. We now know that each of the three main functions of our brain, instinctive, emotional and intellectual, is responsible for initiating a decision process: shall I do A, B or maybe C? This decision process, or as we will see soon decision science, is fascinating because it explains so many of our daily decisions in financial matters as well as in life in general.

The most enlightening and insightful work on heuristics and decision science originated with Amos Tversky and Daniel Kahneman in various research papers and scientific articles on this subject. Daniel Kahneman, who is a psychologist by training, is the recipient of the 2002 Nobel Prize in economics, which he would have shared with Amos Tversky, had Tversky not passed away in 1996.

In his latest book, Thinking Fast and Slow, Kahneman expands on the research originated by the psychologists Keith Stanovich and Richard West regarding the two modes of thinking: System 1 and System 2. According to Kahneman, “System 1 operates automatically and quickly, with no effort and no sense of voluntary control, and System 2 allocates attention to the effortful mental activities that demand it, including complex computations.”

Sound familiar? Of course it does; we can clearly see the connection between our brain parts and functionality and the heuristic process that goes on in our mind when making decisions. When we look at the key attributes of our instinctive and emotional functions of the brain, they correspond with the automatic and fast decision process of System 1, and when we look at the attributes of our intellectual function of the brain, it corresponds with the mental activity, which is at the heart of System 2.

Now we have a connection between the first two of the three elements leading to financial behavior: physiology, psychology and behavioralogy. The connection between our brain function and heuristic processes is important because it supports one of the basic assertions of this book, which is that our financial decisions are explainable and therefore predictable. In other words, regardless of our financial behavior, there is a reason why we acted in one way or another, and it was not a random behavior that can’t be traced or anticipated. The fact that there is a connection between our brain functionality and our decision process is the basis for behavioralogy.

The research and experimentation conducted by Kahneman and Tversky throughout the years is very extensive, and some of it is outside the scope of this book. There are, however, certain aspects of their research that are very relevant to financial behavior, and to the link between our decision-making process and our behavior. I would like to discuss some of these...

Produkt-Details

• Erscheint lt. Verlag: 22.1.2014
• Sprache: englisch
• Themenwelt: Sachbuch/Ratgeber ► Beruf / Finanzen / Recht / Wirtschaft ► Geld / Bank / Börse
• Themenwelt: Sachbuch/Ratgeber ► Gesundheit / Leben / Psychologie ► Lebenshilfe / Lebensführung
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Marketing / Vertrieb
• Themenwelt: Wirtschaft ► Volkswirtschaftslehre ► Finanzwissenschaft
• Themenwelt: Wirtschaft ► Volkswirtschaftslehre ► Wirtschaftspolitik
• ISBN-10: 1-62287-477-3 / 1622874773
• ISBN-13: 978-1-62287-477-4 / 9781622874774