A recent study into what drives our spending behaviour revealed some interesting results providing us with some insight into our own personal money choices.
The paper entitled Born to Spend? How nature and nurture impact spending and borrowing habits was commissioned by US-based Chase Bank and investigated whether people who are good with money were raised being taught about finances or whether it was due to the way we are wired. The conclusion is that the make-up of our brain, which is genetic, has a lot to do with the way we relate to money.
The paper describes an experiment which aimed to find out what drives people’s decision-making. People’s brains were scanned while they were faced with healthy and unhealthy food options. The experimenters discovered that the differentiating factor between people who could resist temptation and those who could not turned out to driven by different brain region activity.
According to the paper, the prefrontal cortex is the region at the front of the human brain associated with slow thinking and the experiment identified two regions in this part of the brain.
The researchers called one region of the brain “V” and the other region “D.” The researchers explain that everyone uses the region V to make value-laden decisions. When we face a choice, region V lights up.
However, region D only lights up for people who balance health benefits against taste. “This is because region D appears to modulate the activity of region V. Region D is like an internal voice, forcefully asking, as we think of reaching for a candy bar, whether we need the extra sugar or would instead benefit by choosing a more nutritious alternative,” explains the paper’s author, Dr Hersh Shefrin. Dr Shefrin argues that part of the reason why in key situations the brain regions of some people light up but those of others do not, has to do with genetic differences.
What this tells us is that nature definitely matters for financial decision-making, just as it matters for athletic ability and physical traits.
Shefrin says people with a particular gene variant appear to make better financial decisions. “Because the same genetic variant is also associated with better learning, it is plausible that people with this genetic variant have learned to be more financially literate than others, and to make better financial decisions. This suggests that traditional financial education might only have a limited impact on financial behaviour,” says Shefrin.
This is not however an excuse to go on a spending spree. The researchers also found that parenting around financial issues has a greater influence in younger people. While genes explained about 33 percent of savings behaviour, parenting explains 40 to 50 percent of savings behaviour for 20 to 25 year olds.
The parenting influence does decline as children get older, while the genetic influence is long lasting, and does not disappear later in life. However, if as a parent you are able to influence the spending habits of a young person when they receive their first pay-cheque you are at least able to get them to make good financial choices early on that will benefit them later in life, such as not taking on short-term debt and starting a retirement plan. So good parenting is still beneficial.
If you are one of those people whose “D” region is seriously lacking, you need to be aware of your tendencies and put systems in place to protect yourself from your choices:
Remove temptation: Just as you do not have cookies and chocolate in the house when you are trying to lose weight – know that you are the sort of person who cannot have access to credit. Do not take out a credit card believing you will just use it for emergencies – you won’t. Every time you see a gorgeous pair of shoes it will feel like an emergency.
Commit to savings in advance: The Save More Tomorrow principle is that you commit to saving with your next salary increase. Researchers have found that if you ask people to save from their existing income that they are accustomed to living on, they will register it as a mental “loss”. However if the saving comes out of a raise before you have got used to living on your new income, it will not feel like a sacrifice.
Use online financial tools to manage your money: Researchers found that people who were more aware of their money and how they were spending it tended to make better financial decisions.
Get a coach: The first thing they tell you when you start a diet is to tell everyone so that you stick to it. A financial adviser can encourage you to save and will also act as a conscience when you are tempted to spend frivolously.