Understanding Psychological Barriers to Money
Whether it’s overspending, skipping out on retirement savings or not eating healthy foods, there are many ways we get in our own way with money. Understanding the psychology behind these barriers can help you overcome them and take control of your financial future.
As with dieting, it takes time and perseverance to maintain behavioral change. It gets easier with time, and it is crucial to success.
The Brain’s Perception of Wealth
Money words like dough, wonga, and greenbacks have a psychological force that makes you more self-reliant, less likely to help others, and even creates an irrational sense of moral entitlement. Interestingly, upper-class people can be as blind to this effect as poor people. In one study, UCSF scientists gave participants the chance to earn and save cash by responding to color circle and performing a time perception task. Those with more money were worse at both activities. Similarly, researchers have found that simply thinking about money leads to unethical behavior. A recent study, for example, showed that drivers of luxury cars were more likely than other drivers to cut off pedestrians.
In the same way that the amygdala warns us of threats real and imagined, money triggers fears and irrational behaviors. For instance, studies have shown that poor people preoccupied with financial problems perform worse on cognitive tests, and that thinking about money can deplete willpower.
You can overcome these obstacles by focusing on your goals and values. You can also identify passive barriers which prevent you from changing habits and take action. You can also build a supportive social circle, or find an online community that will hold you accountable to your savings goals.
Cognitive Biases in Financial Decisions
Cognitive biases can lead to systematic deviations away from a standard for rationality or good judgement. These can be very costly. For example, investors are often prone to risk aversion and the sunk cost fallacy — they’re too afraid to abandon past investments that have lost value. They also experience herd mentality, status quo bias and other cognitive biases that limit upward economic mobility.
A number of these biases have been shown to affect financial decisions, including recency bias, familiarity bias, confirmation bias and overconfidence bias. These biases affect financial decisions in many ways, such as by encouraging people to only consider recent information or by making decisions based upon their preconceived notions.
Investors may also be influenced if they anchor their initial estimate of the value of an item, even when new information is available. Investors can also be influenced through narrative bias. This is when information is interpreted in terms of a larger pattern or story. They may also be affected by the ambiguity effect. All of these factors may contribute to irrational decisions during Covid-19. This has made it difficult for investors to find the best investment opportunities.
Neuroplasticity and Financial Growth
Neuroplasticity, in addition to helping us overcome financial biases and improve our decision-making abilities, can also help us develop new skills. Learning is a great way to boost neuroplasticity because the more we use our brain the stronger and healthier it gets. It also helps to surround ourselves with inspiring people and engaging activities, like meditating, exercising, or exploring different cultures.
Our beliefs and perceptions shape our behavior, which in turn shapes our financial outcomes. When a client’s beliefs are misguided, they can lead to self defeating behaviors and prevent them from achieving their goals. These beliefs are often rooted in the client’s past experiences, which influence their values, expectations and fears about money. If someone grew up in the Great Depression they may have frugal behaviors, strong beliefs and salient fears that impact their current financial beliefs.
Fortunately, these beliefs can be changed by real-life experience, as well as the use of visualization and imagination. These techniques, along with a solid implementation and coaching plan, can help overcome a client’s mental barrier to wealth.
The Emotional Brain and Money
When it comes to money, our emotions can override logic. These emotional states can make it difficult to stick to long-term goals.
When we’re faced with a decision, our brain evaluates the trade-off between immediate and delayed gratification using two different processes. The nucleus, which is similar to the gas pedal of a car, accelerates the drive for rewards, while the prefrontal cortex acts as a steering-wheel, directing the reward-seeking towards specific goals.
Consider the classic Ultimatum game. Participants are given $10 to split between themselves and a stranger. According to fMRI research, most people will accept fair splits, but if an unfair offer is made, their brain will react with anger and disgust.
Keeping your emotions in check can help you make financially sound decisions. Understanding these psychological barriers can help you make a commitment to achieving your financial dreams and kicking self-sabotage to the curb. Maintaining behavioral change can be difficult, but it gets easier over time. In episode five of Huddle Up with a Financial Coach, Julie and Jackie discuss some of the challenges to maintaining consistency when it comes to saving and investing. Podcast, Julie and Jackie discussed the challenges of maintaining consistency in saving and investing.
Neurological Foundations of Scarcity vs. Abundance
If you have a scarcity mentality, you may feel that there is never enough money and that other people are richer than you. You might find it difficult to be satisfied with what you have and spend time on activities that bring you joy. You might also struggle to connect with your true self and others. This leads to an underlying anxiety of not being valued, loved and supported.
A scarcity mindset also causes a great deal of stress. This is because our nervous system and bodies are constantly mobilized. If we get too many mobilizations, cortical function gets inhibited (think flipping your lid) and it inhibits the part of the brain that supports creative problem-solving, learning, focusing, decision-making, and collaboration.
Growing up in scarcity of any kind (food, shelter, income, time, love) is a major trauma and it changes your brain and behavior. It is unlikely that you will be able to overcome this problem without addressing the root cause. A financial therapist can help you or you can re-examine your past experiences. This can help you learn why you were raised with scarcity and how to retrain the brain for abundance.
Harnessing the Brain’s Reward System
If you want to improve your financial situation, it’s important to identify barriers and remove them. Whether you’re spending too much, buried in credit card debt, or keeping cash in bank accounts earning near-zero interest, there are often hidden motivations driving these behaviors.
The brain has a primary rewards system that releases dopamine and other neurotransmitters to reinforce positive stimuli. This encourages us to repeat the behavior. This system is called the mesolimbic path and includes brain structures like the ventral tegmental region (VTA) of the midbrain and the amygdala.
These structures are activated whenever we experience a rewarding stimulus such as food, money, sex, or drugs. The VTA sends the dopamine to striatums, amygdalas, and hippocampus to influence behavior. The accumbens processes this reward signal to determine if we should avoid or seek out the stimulus.
External incentives can give you a boost. However, relying on these can reduce your intrinsic motivation. They can also cause you to focus on the prize too much and miss important steps. This can make it harder to reach your financial goals in the long term.
Neuronal Strategies in the Money Mastery Program
Designed to help people break free from self-destructive behaviors that keep them from achieving their financial goals, the Mind Over Money Mastery Program teaches participants how to understand and overcome 12 common money barriers. The course is taught by Myron Gold, a best-selling speaker and author with 38 years’ experience in corporate life. It covers everything from money management strategies to the psychology of wealth.
The course consists of 49 downloadable audio and video lessons. In the first module participants are able to determine where they stand in their money game, and what they need to do to succeed. Then they create measurable, attainable goals, such as paying off debt and creating an emergency fund. The course then moves on to more masculine strategies, such as investing in diversified assets or generating a specific return on investment.
The course also addresses active obstacles that can prevent people taking action, like a lack support or time constraints. It teaches the principles of effective communication and provides tools to manage one’s own time and energy. It teaches leverage, which is the key to success. If a person is able to make their money do more than what it does on its own, they can build wealth much quicker.