For Release: May 4, 2010

Denver, Colo. – Many individuals make poor investment and money decisions because the human brain developed certain functions prior to the complexity of today's financial world. That's the conclusion of author Doug Lennick, CFP^®, in his article "Money on Your Mind: The Brain's Role in Financial Decision-Making," published in the April issue of the Journal of Financial Planning.

"Most financial planners are familiar with concepts such as the herd mentality, overconfidence, and loss aversion," says Lennick. "But some of the financial misadventures we see among clients go even deeper than these social and behavioral bad habits."

Lennick says the sophistication of modern civilization masks the fact that our brains have evolved little since prehistoric times. The neural programming of human beings was optimized for physical survival, not contemporary challenges such as financial decision-making.

The author notes that the human brain has separate, dedicated centers for coping with situations that present imminent danger and attractive rewards. When triggered by highly stimulating personal or financial events, these centers can cause the brain to react reflexively, dampening our ability to think analytically.

Similarly, our predisposition to look for patterns in events—an advantage for the Stone Age hunter—can be a weakness when making decisions about situations that are fundamentally random and unpredictable, such as market volatility and the financial downturn.

Today's technology gives us ready access to our credit, savings, and investment accounts, the article says. Unfortunately, quick access makes it easier for people to act upon impulsive financial decisions. Lennick uses a case study to demonstrate how the perception of financial dangers or rewards can unconsciously trigger emotions that override our rational decision-making. In his example, an investor reacts to a sudden market downturn by selling his investments at a depressed price, thereby missing out on market recovery and locking in his losses.

"Though we're wired to behave in ways that can get us into financial trouble, our brains also have the capacity to create response patterns and new habits," Lennick says. "With practice, we can undo [clients'] typical reactions to financial situations and establish new responses that activate the logical parts of their brains. And the first step to reprogramming their brains is to get in touch with the values they would like their financial decisions to reflect."

The article is adapted from the new book Financial Intelligence: How to Make Smart, Values-Based Decisions with Your Money and Your Life, which Lennick wrote with Kathy Jordan, Ph.D.

The April issue of the Journal also features the article "Widowed Before Retirement: Social Security Benefit Claiming Strategies," by Amy N. Shuart, David A. Weaver, Ph.D., and Kevin Whitman. The article discusses rules unique to widows approaching retirement and uses present value analysis to examine the effects of various scenarios.

For more information, visit www.FPAjournal.org.

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