Our Emotional Relationship with Money and why it Matters

Published: June 1, 2020 | 12:53 AM ET

By: Ivory Johnson, CFP, ChFC, Founder, Delancey Wealth Management, LLC

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Money is indeed emotional and our relationship with it will often determine how successful we are in managing our resources. Once we put pie charts and financial plans aside, it all makes perfect sense.

You’ll recall that the brain is divided between the limbic system, neocortex and reptilian brain. The latter controls our animal instincts that help us survive.  The four F’s – Fight, flight, food and ……. reproduction are all governed by the reptilian (or primal) brain. It seems, however, that the amygdala in the limbic system controls emotion and under stress will hijack the neocortex that makes the rational decisions.  This tends to generate survival behavior when a rational response would be better suited.

Lo and behold, studies routinely show that money is the number one source of stress for Americans, frequently generating biologically predictive financial behavior. This is one of the reasons we pull money out of the market during times of volatility – stress overrides the neocortex which would otherwise advise us against timing the market. Naturally, the reptilian brain chooses to flee for safety because it prefers survival above all else.

Investors are all too familiar with the narrative that nothing goes up forever. After all, we’ve seen GDP growth decelerate on a rate of change basis, earnings growth has followed suit and there may be more bad news in 2020.

Veterans of the 2000 and 2008 crash remember what that felt like, and while the market rebounded both times, who’s to say it will do so again, when they are 10 years older and that much closer to retirement. Our brain has not changed, even if the circumstances are different. The current environment does not resemble 2008, one predicated on opaque investments and debt, but the fear of a market decline is natural all the same.

There was a time when we had to respond to every sound in the forest to ensure our safety and the brain was constructed to accommodate that risk. Today we have the luxury of taking a step back and a deep breath to review the data before making a decision rooted in fear and past experiences. This time is different because it always is. No two results are ever caused by the exact same dynamics, even if the results may resemble one another.

Our experiences in life, some more traumatic than others, will often cause the brain to sound the alarm and bring us back to a place of comfort. We would all be wise to identify how and why we make these decisions to become more financially astute. Or said another way – it’s time the neocortex lets the reptilian brain know who’s boss.

Ivory Johnson, CFP®, ChFC
Delancey Wealth Management, LLC
20 F Street, NW, Ste. 750
Washington, DC  20001
(202) 507-6340

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