Managing your stress will help your brain make better decisions about money

Emerging brain science has proven that stress can cause investors to make impulsive, high-risk decisions about their finances.

While the uncertainty brought about by Covid-19 has undoubtedly impacted on our mental health, it only added to already high levels of mental strain. According to Bloomberg, in 2019, South Africa was rated the second-most stressed country in the world, after Nigeria.

“The connection between stress and money may seem self-evident: reduced income, job insecurity and high debt is a recipe for anxiety,” says Sharon Moller, Financial Planning Coach at Old Mutual Wealth. “But emerging brain science research has proven that stress also causes us to make impulsive, high-risk decisions about our finances.”

She says that this, in turn, increases our anxiety levels and further compromises both our mental and physical health, creating a ‘chicken or the egg’ scenario. “In situations of extreme uncertainty, these impulses unchecked can, for example, result in us selling our blue-chip shares at an all-time low or overexposing our portfolio to a single asset class because of perceived scarcity,” says Moller.

“The suboptimal financial outcomes as a result of these irrational decisions, however, can result in post-decision dissonance — or buyers remorse — that leaves us feeling deeply disappointed and even more anxious in the long run.”

Why stressed brains make bad money decisions
In 2017, neuroscientists for the Massachusetts Institute of Technology found that ongoing stress causes a specific brain circuit used in cost-benefit decision making to malfunction, making us prone to impulsive actions. Their findings form part of a large body of research that shows chronic stress inhibits strategic thinking.

There are several, sometimes complex biological processes at play. What we need to know, according to Moller, is that uncertainty about our financial wellbeing invariably triggers the part of the brain primarily concerned with survival – what’s known as the limbic system.

Then, stress hormones such as adrenaline and cortisol flood our systems. When this happens consistently over a prolonged period, it actually kills off brains cells and stops the body from producing new ones.

What’s more, when stress causes the limbic system to go into overdrive, it also gobbles up energy that would otherwise feed the prefrontal cortex – the part of the brain that weighs up information to make choices in a logical, systematic way.

This is why, when your stress switch is permanently switched to ‘on’, you’re more likely to jump to unfounded conclusions and feel compelled merely to act – to do something, anything, even if the action doesn’t make any sense. “It causes tunnel vision,” says Moller. “You can’t see critical details because you’re operating from your brain’s fear centre, which is not where careful reasoning takes place.”

“Given the current economic context, we can’t eliminate financial uncertainty. But when we know how stress alters our brain chemistry, we can practise ways to manage anxiety, calm the emotional brain – and so avoid risky money behaviours, ” explains Moller

Moller suggests the following three practical steps to manage stress.

1. Cultivate awareness of your body’s clues
The best way to avoid panicked decisions is to avoid triggering the ‘emotional brain’ in the first place. Of course, you can’t consciously control which region of your brain that light ups, but your body will likely send you vital clues. Your heart might start to pound and your breathing may speed up.

If you can notice these signs in time, there’s an opportunity to soothe the limbic system before it gets carried away.

2. Be still and breathe
Practising meditation or some kind of mindfulness daily will finetune your ability to pick up on your body’s clues. Moller recommends at least 30 minutes a day to develop an awareness of subtle signs of stress and shift out of the stricken, muddled thinking it can cause.

3. Find words for feelings
If you miss the small window of opportunity to avoid setting off the emotional brain, you can still steer clear of questionable choices by naming your emotions.

Identify just one or two words that express what you feel as this will downregulate the limbic system and bring the prefrontal cortex (and your capacity for measured, rational thought) back online.

Over time, chronic stress can lead to depression, and according to research can put you at risk of developing an addiction. It’s also an established risk factor for heart disease, diabetes and other serious conditions.

“By spending more time in rational cognitive space, we counteract the effects of stress, sidestep the risky behaviours it can cause, and build the brain’s capacity to identify new perspectives and opportunities. When it comes to long-term financial health, that can make all the difference,” Moller concludes.