How your biology affects your financial behaviour
In this fourth episode of our “Emotions and Money” series, Maya and Paul Nixon, head of Behavioural Finance at Momentum, discuss the impact of our biology on our financial decision-making, and how we can avoid making investment mistakes when our biology sends us into panic mode.
As the costs of brain imaging and genetic sequencing have decreased, it has become easier to study the links between biology, chemical processes and financial behaviour. We now have a better understanding than ever of how these connections operate.
Did you know that crying is a way for your body to release cortisol? Scientists have discovered that emotional tears flush your body of cortisol and contain traces of oxytocin which is the trust and bonding hormone.
When it comes to our emotions, there is always a biological response, and that response can also impact our money and investing decisions.
When we panic the body receives a signal from the brain that results in an elevated heart rate, sweaty palms and dilated pupils. This activates the fight or flight reaction.
But in the process, the brain blocks access to higher-order thinking in the prefrontal cortex. This means that biologically, people run or fight first and ask questions later, especially if they already have an anxious disposition.
In an investment context, this biological response could lead people to make poor decisions, such as trying to avoid losses by switching to perceived safer assets like cash in times of uncertainty. This often results in the opposite because it locks in a “behaviour tax” as the losses are realised.
It is clear that our personality and emotions play a huge role in our decision-making and the better we understand our behaviour, the more likely we are to achieve our financial goals.
Emotions and Money is a six-part podcast series in partnership with Momentum Investments, in which we unpack the psychology behind our investment decisions and how our emotions could be sabotaging our financial outcomes.