Neurology of Investing – The Critter Brain and the Human Brain
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Who’s Managing Your Money? This question is more important than you might think, because your brain was designed for survival and not for growing money. This can be a serious problem if you want to beat the S&P 500, or at least have your money grow at a respectable rate.
If you want to beat the S&P 500 you will have to understand the difference between the two parts of your brain; the critter brain (the oldest part) and the human brain (the newest part, known as the pre-frontal cortex).
The Critter Brain
The critter brain sits at the top of the brain stem. Its job, among other things, is to makes sure that your heart beats, your lungs take in air and your body temperature is regulated. To accomplish this, the critter brain is continually answering two questions:
1) Am I safe? and
2) Can I survive this?
If the answer comes back “yes,” then the body keeps doing what it is doing. But if the answer is anything less than a resounding “yes,” the critter brain will tell the body to take evasive action until the situation is survivable.
A problem arises from the fact that the critter brain doesn’t understand time nor does it see time as relevant; the critter brain does not know the difference between you as a three year old and you as a forty-three year old.
You could get into trouble if, at three years of age, it wasn’t coded in your critter brain that growing wealth is survivable.
Another fact is that the data coded in the critter brain-the data that evaluates survivability-is downloaded from parents between conception and around four years of age. This is how our parents’ beliefs can, and often do, become our own beliefs.
The early downloading of beliefs creates the foundation for our survival behaviors when it comes to investing and growing wealth (it’s interesting to note that these beliefs do not automatically get updated as new knowledge of the world is gained).
Once the coding is complete (around four years old), new information is pretty much ignored. The question “Can I survive this?” is answered by checking against the approved list of survivable situations. The critter brain will do everything in its power (and it has a lot of influence) to turn its owner in a direction that is “known” to be survivable and safe.
For example, if the critter brain notices a pattern in the woods that might be coded as a bear, it will immediately tell the legs to run! The body will respond immediately without thinking or processing. As soon as the critter brain can answer “Yes” to “Am I safe?” the legs will slow down.
It’s the same with the stock market. If the critter brain notices that you are growing wealth AND it has never survived this before, then the critter brain will steer you toward evasive action to stop this from happening. In this case, growing wealth, like meeting a bear in the woods, is not coded as a survivable event.
For the critter brain, survivability is more important than any logical brain function. If you know that you are doing something that doesn’t help grow your money in the stock market, this knowledge, by itself, will not change or affect your behaviors.
People continue to do the same things after they have acquired new knowledge that teaches them to do otherwise because their critter brain is not allowing the new knowledge to be applied in survival situations. This is key, please read this paragraph again.
The Human Brain
Now let’s focus on the other part of the brain; the human brain. The human brain is the newest part of the brain and is located in the front of the skull. It is known as the prefrontal cortex, and is the part of the brain that separates us from chimpanzees and all the other mammals on the planet.
The human brain performs high-level processing, such as solving complex problems, does rational thinking and strategies long-term goals. This is the part of the brain we’d like to have making our investment choices.
When we create situations that allow the human brain to make investment choices, our money grows, but the human brain can only make investment choices when the critter brain is not in the driver’s seat.
The Critter Brain and the Human Brain – A Dysfunctional Family (or, “The Problem”)
If there is any doubt by the critter brain of the survivability of a situation, it will run the show. Running the show means it will go into “fight or flight” mode, and neither fighting nor fleeing will be helpful for your brokerage account balance.
Said another way, the critter brain will force you to change the current situation until it can be coded as survivable. Unfortunately for many humans, losing money has been coded as survivable, while GROWING money with ease is not survivable.
If you were born of parents whose belief system was coded with the idea that being poor or losing money is survivable (and therefore you don’t need to do anything about being poor or losing money), then you as their offspring might also have this code in your belief system.
(to be continued)
Together, we are growing your money
RC PECK, CFP
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