Understanding Psychological Barriers to Money
There are many ways that we can get in our way when it comes to money. Understanding the psychology behind money barriers can help you overcome these barriers and take control of 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. It is interesting to note that upper-class people are just as blind to the effect as poor people. In one study, UCSF researchers gave participants the opportunity to earn and save money by responding to color circles and performing a timing perception task. Those who had more money performed worse in both activities. Researchers have also found that thinking about money can lead to unethical behaviors. For example, a recent study showed that drivers in luxury cars were more likely 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 find an online community or a supportive social group that will hold you accountable for your savings goals.
Cognitive Biases and Financial Decisions
Cognitive biases are tendencies that can lead to systematic deviations from a standard of rationality or good judgment. These can be costly. Investors are often prone towards risk aversion, the sunk-cost fallacy and other cognitive biases. They’re afraid to abandon investments that have lost their 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 can also be influenced by anchoring bias, which involves sticking to their original estimate of an object’s value even when new information becomes available. Investors can also be influenced through narrative bias. This is when information is interpreted in terms of a larger pattern or story. Lastly, they may be affected by ambiguity effect, base rate fallacy, category size bias, extremeness aversion and temporal discounting. All of these factors can contribute to irrational decision-making during Covid-19, which has made it challenging for investors to find the right investment opportunities.
Neuroplasticity and Financial Growth
In addition to addressing financial biases, neuroplasticity can help us develop new skills and improve our ability to make sound decisions. The more we use our brain, the stronger and healthier it becomes, so learning is one of the best ways to boost neuroplasticity. It is also helpful to surround ourselves with inspirational people and engaging activities like meditating or exercising.
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 faced with a choice, our brain uses two different processes to evaluate the trade-offs between immediate and delayed rewards. The nucleus accumbens, which is like the gas pedal on a car, accelerates our drive for rewards; while the prefrontal cortex acts as a steering wheel, directing reward seeking toward specific goals.
Consider the classic Ultimatum game. Participants are given $10 each to split with a stranger. Most people will accept fair offers, but if they are offered an unfair split, their brain responds with anger and disgust, according to fMRI studies.
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 the Huddle Up with a Financial Coach! podcast, Julie and Jackie discussed some of the challenges to maintaining consistency when it comes to 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 may also find it difficult to connect with yourself and others. This leads to an underlying anxiety of not being valued, loved and supported.
In addition, having a scarcity mindset causes a lot of stress. This is due to the fact that our bodies and nervous system 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 with scarcity (food, shelters, income, love, time) is a major traumatic experience that changes your brain and behavior. Trying to overcome this without getting to the root of what caused it will likely be unsuccessful. Getting help from a financial therapist or re-examining your past experiences is a great start. This can help you discover why you were raised in scarcity and learn to retrain your brain for abundance.
Harnessing the Brain’s Reward System
If you want to improve the state of your finances, it is important to identify and remove barriers. 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 reward system that triggers the release of a number of neurotransmitters, including dopamine, to reinforce positive stimuli and motivate us to repeat those behaviors. 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 dopamine to the striatum, amygdala, and hippocampus in order to influence behavior. The accumbens processes this reward signal to determine if we should avoid or seek out the stimulus.
External incentives can work to give you a boost, but relying on them can reduce your intrinsic motivation and lead you to focus too narrowly on the prize and skip important steps in the process. This can make it harder to reach your financial goals in the long term.
Neuronal Strategies in the Money Mastery Program
The Mind Over Money Mastery Program is designed to help people overcome self-destructive money behaviors that prevent them from reaching their financial goals. Participants learn how to understand and over come 12 common money barriers. The course, taught by Myron Golden, a best-selling author and speaker with 38 years of corporate experience, covers everything from the psychology of wealth to money management strategies that work.
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. They then create measurable and attainable goals such as paying down debt and creating an Emergency Fund. Then the course moves into more masculine strategy-related topics like investing in diversified assets and generating a specific annual return on investments.
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 also teaches the key to success: leverage. If a person is able to make their money do more than what it does on its own, they can build wealth much quicker.