October 28, 2020

it’s not the numbers, but your brain



If you are about to make an investment decision, know that opting for one option or another, contrary to what it may seem, little or nothing will have to do with numbers or with a biased calculation or with vast financial knowledge. The cause that will lead you to be a more or less risky investor is in your own brain. Neuroscience has reached such a level of development that, as of today, it can already be observed clearly and instantaneously how different brain areas respond to certain stimuli or to decision-making, an observation that has extended to other areas such as marketing, politics, management, and also finance.

When these answers are transferred to the world of investment, it is called neurofinance, which have a strong cultural component that, traditionally, has been associated with the social sciences, when in fact they have more to do with biology, as different studies show that culture is an evolution of the central nervous system.

So, the neurofinance, which would be related to the deepest areas of our brain, describe how an individual behaves in a risk situation and how he uses his nervous system in these decisions. Hence we can say that investment determinations go far beyond numbers. “It’s not so much about figures as impulsive decisions that have to do with the part of the reptilian brain that is precisely the one that regulates emotions,” he explains. Jocelyn Quintero, author and lecturer specialized in financial harmony and expert in neurofinance. Therefore, it is the interaction between the different areas of the brain that leads us to choose and, therefore, to take a more or less risky option when investing.

Risk and reward

When it comes to leaning towards one possibility or another, according to Quintero, several systems are involved, such as that of risk aversion or reward. While the former helps us know what we are willing to lose; the second combines factors that have to do with the intensity of loss and gain.

«In the case of an aversion system, studies have found that the loss is not symmetric with respect to the gain. That is to say, our brain perceives losses with an intensity 2.5 times greater than the reward. Contrary to what we can think, our mind will not warn in the same way earn 1,000 euros than lose the same amount because the human brain always tends to oversize the loss. So, to compensate for a impairment of 1,000 euros, we should recover 2,500 to balance the feeling», He says.

Our brain is designed to be in survival mode and not growing. “This phenomenon, which is physiological, is what makes, for example, that people generally do not risk and prefer to keep a safe job to look for another even if it does not satisfy them,” Quintero points out.

Although our brain prioritizes the safe, there are determining factors that can change our perception and that can keep us as a more conservative investor or, conversely, that we evolve towards a more risky one in search of profitability:

– Culture. There are cultures in which growth is penalized, in which risk is frowned upon. Assuming it looks like something dangerous, so the group tends to protect the individual by telling him what is best for him. However, there are others in which he is awarded, as is the case of the Anglo-Saxon. The words undertake or invest are related to adventure. Socially, support the entrepreneur. It looks like something positive.

– The family environment: In this sense, the family experience around a business becomes decisive. If there was a business failure, the family will tend to make the positions more conservative. Also having an entrepreneurial father, with a low-stable family economy, with highs and lows, may be conditioning our brains when it comes to taking risks.

– Our own experience. It will always give us a cognitive bias. If, for example, on some occasion we have lent money and have not been returned, we will tend to think that we do not have to do it again.

«These three things are added to our neural system and make us have the resilience before losses or not. Many times, The influence of these elements is of such magnitude that the individual is unable to manage and assume these losses, which can lead to a situation of despair and even suicide.», Concludes the author.

By combining all these factors, you can draw your own investor profile that, according to experts, has more to do with your mental processes than with the financial knowledge you have.

Is Spanish as conservative as it seems?

Jocelyn Quintero considers that, when describing the investment profile of the Spaniards, there is a paradox. Traditionally, it has been associated with a conservative attitude. However, their behaviors are closely linked to the emotional part because of their openness, which can sometimes lead them to make risky decisions. Proof of this, according to Quintero, was the adoption in Spain of the euro. There was an exacerbation of resources, with the entry of liquidity into the system, which led to massive indebtedness. «The Spaniards are conservative, but when there are resources, they make risky decisions. Emotionality leads individuals to take risks and make mistakes. Wrong is not a bad thing, the bad thing is not to learn from it, ”Quintero emphasizes.

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