This is Your Brain on Credit
Friday, May 6, 2011 at 3:19PM Today's post if from a real favorite of mine - Jennifer! She's a brilliant brain marketer and I hope you really enjoy her contribution. Be on the look out for our next speaking engagement as well - def worth checking out :)
You’ve probably heard that credit can lead to dangerous levels of debt, but if you’re like most people you thought, “not me”.
Yet despite the known dangers of credit debt, too many Americans find themselves with piling bills well outside their means. It seems irrational.
And it is.
We humans tend to overestimate our powers of reason, and underestimate the unconscious drivers of our behavior. Let’s look at what happens in your brain when you spend cash vs. “charging it”.
Old Brain vs. the Modern Jungle
According to Jonah Lehrer from his book, “How We Decide”, “Paying with plastic fundamentally changes the way we spend money, altering the calculus of our financial decisions.”
Our brains were designed for a very different environment than the one we live in today; an environment where resources were scarce and sometimes risky to acquire. Our brains were wired to seek pleasure “now”, to not be patient about acquiring new resources, and to be stingy with what we gave away and to whom. In other words, we overvalue immediate gains and/or losses, and devalue future gains and/or losses.
In a daily battle for survival, this set-up worked well (just look at how many of us there are!), but the modern environment can create scenarios that make us act against our own best interest.
When you spend cash your brain has to decide between an immediate gain (the purchase) and an immediate loss (the giving over of your cash). Parting with your money or other resources activates your amygdala, a brain region that processes rapid emotions, mostly negative. A cash purchase creates “loss aversion” because it is a tangible loss; your wallet is actually lighter.
Conversely, when you make a purchase with credit there is no immediate, tangible loss that you can see or feel.
It doesn’t matter that with credit the loss is greater given the cost of purchase, interest rates, and additional miscellaneous charges, because the loss is too far in the future. Nothing tangible happens except the immediate gain! Areas of the brain that are normally activated and implicated in “loss aversion” are not activated during a credit card purchase, but the brain’s pleasure areas for immediate gain still are. Instead of a safe tension between loss and gain, purchasing with plastic gives us nothing but the rush of pleasure from immediate gain.
Credit cards, essentially, bypass parts of the brain that make it more difficult to overspend, or give away, our resources.
What’s more, banks are well aware of your weakness when it comes to credit, and take advantage of it by sending you offers with “teaser” interest rates. Again, these teasers appeal to the emotional, more impulsive parts of our brain that seek immediate gain while the regions of the brain that should be activated in loss aversion are tricked into not seeing the risk because it is too far in the future (and thus too abstract).
And it’s not just credit cards that transcend our brain’s best defenses against debt; we now carry even our “real” money with plastic by way of debit/ATM cards, and the technology to process payments digitally is far out-pacing our brains’ capacity to detect the risk.
You Need a Bag of Brain Tricks
What can you do, short of reverting to carting around all your cash? When your brain is subject to being tricked, you’ve got to arm yourself with your own bag of brain tricks.
- Plan Ahead and Budget – Planning and budgeting will help exercise the rational parts of your brain and keep the losses and gains visual and more tangible. Be sure to “pay yourself first”, allow for fun money, and plan to save for those luxuries that you really want. Being financially savvy doesn’t need to turn you into a Scrooge. Remember that the root of “miserable” is “miser”.
- Put Your Budget Where You Can See it – Download a budget app to your smart-phone, or create a visual display of your budget that you see daily.
- Don’t Carry Credit Cards – You’ve heard it before, but now that you realize your brain, not just your will, is susceptible to the siren call of credit, I hope you’ll be convinced.
- Create a Physical Barrier Between You and Your Emergency Card – If you carry or keep a credit card for emergencies, enclose it in something that reminds you. Preferably something you have to break, or something red.
- Use Cash for Your “Fun” Money – Keep a stash and take with you what you need for the day.
- Use Cash for In-Store Shopping – Make a list that stays within your budget, include fun items, bring a calculator, and visit the ATM just before to take out only what you need.
- When all else fails, you can always get yourself a “proverbial wallet” - http://www.youtube.com/watch?v=epyBkzB2g0E
Jennifer Williams is a cognitive marketing specialist, speaker, and trainer focused on “better marketing through science”. She blogs at www.verilliance.com and tweets @verilliance.
Reader Comments (8)
Budgeting enables us to save a lot of money. It is good to have your budgeting goals written down so you see them everyday to focus on your savings.
Budgeting enables us to save a lot of money. It is good to have your budgeting goals written down so you see them everyday to focus on your savings. Online loans
Budgeting plays an essential role in a person’s financial life. But, there are many people who hate the B-word because they think that budgeting will not let them to take benefits from their life the way they want.
Budgeting allow us to save a lot of money. It is better to have your budgeting goals written down so you can observe them everyday to centre on your savings.Same day payday loans
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