Chemistry and Finance
I find it quite curious that companies are more interested in learning about cognitive biases to improve their products, marketing and sales processes, but they are not yet able to recognize the importance that this has on their own financial processes and the improvement in decision making about their investments,” says Joselyn Quintero, a specialist in neurofinance.
For this expert -who works to help people make conscious financial decisions in environments of risk and uncertainty- money is a reflection of the human being and understanding personal neurochemistry is more important than having all the information on the table. The biggest financial crisis of the human being is not in his pocket or in his country, but in his mind, he observes.
It is nothing more than making paradigm shifts in our thoughts to feel the world differently. From that organ we manage the same situation as always with a different biochemical charge than we are used to. It is a new internal scheme that leads us to new results”.
An addiction like any other
A good example is the widespread belief about what money is. A priori it seems that we all have it clear: most of the valuable things cannot be bought with money. However, when we review the concept through the new financial disciplines, things change.
According to behavioral finance, money is a modifier of human social behavior and for neurofinance it is a dopamine stimulant, which produces euphoria and can even generate addictive behaviors, like sugar and cocaine.
According to MRI studies alluded to by, among others, Cardiff University Professor of Finance and Investment Arman Eshraghi, winning $100 can make many people feel happy, but losing the same amount can provoke an emotion even more intense than that joy.
Losses trigger greater activity in the areas of the brain associated with negative emotions than those that generate equivalent gains in the pleasure centers,” Eshraghi said.
Thus, according to this discipline, the ability to relate healthily with money begins with an awareness of satisfaction of the most basic needs, since the absence of these are the ones that trigger in the human mind the survival mechanisms that then lead us to make desperate decisions without being aware.
Being rich is not what it seems
In a world where everyone thinks in terms of financial freedom, the first and most important step is to define our levels of financial security, understanding it as the minimum amount of money we need to sleep peacefully,” says Quintero.
A common piece of personal finance advice is to learn to live on half of what we earn. However, when you dig into the way we think, “the vast majority perceive this as earning twice as much to keep spending the same”.
But it is not the same: the first requires discipline in lifestyles, because ?the amount is irrelevant when the essence of the manager is unbalanced, unbridled and uncontrolled. Something that was not taken into account in traditional finance?
In this way, the main problem in the relationship with money, and that causes personal neurochemistry to affect decision-making, is the confusion of concepts (signifiers) around what it is to be rich. And what is it? The intention of most of those who interact in the financial system.
But we confuse being rich with: being a millionaire, being prosperous, being abundant and being financially intelligent,” he clarifies. By making these concepts synonyms, we enter a gray area where money is the north. An example in the investment world is the focus on economic profitability, ?when, in reality, the essence of finance is risk management. That is, learning how to manage losses, not chasing profits?
Hacking the system
Successful investors have a very different scheme of thinking, feeling and behaving than the masses. Not only in relation to the concept of money, but they have also been able to dodge the cognitive biases (currently more than 200 are identified) that intrude in decision making without us being aware of them.
As Quintero explains, “it would require a lot of cognitive load to be aware so as not to fall into error. But the identification of biases and the creation of strategies would be very good for us to reduce their impact?
Humility and little haste
To avoid moving on slippery slopes, Quintero leaves four recommendations: The first, avoid making decisions in less than 48 hours. When we understand that part of our decisions come from a system that acts by default and that its greatest strength is speed, then the first step would be to delay decisions until we have achieved a certain level of rationality.
In the case of investments, this implies having a medium and long term strategy, so that day to day volatilities do not require our attention, let alone immediate decision making.
Developing an attitude towards our own decisions is another piece of advice. After demonstrating that human beings have limited rationality, we know that at the moment of deciding we are influenced by emotions, preferences, memories and culture. It is not about living with low self-esteem, but to have critical thinking towards ourselves.
Open spaces where there are divergent thoughts. We often listen to respond, not to understand, let alone learn. Starting from our limited view of the world can have more breadth if we just decide to be in spaces where people think differently, without the need to debate, respond or impose a point of view. It is about reaching a position that is as objective as possible in order to be able to differentiate all positions, our own and those of others.
Finally, involve friends, colleagues and acquaintances in our decision-making processes. The influence of the masses has enormous power over our preferences. For this reason, he advises reaching agreements with close friends, creating what are known as Ulysses Contracts, which are agreements where you cede to a third party the power to act rationally in the face of your emotionality. These can range from leaving your credit card in the hands of your parents to asking your best friend to change the password on your investment account to avoid logging in.