Increasingly the findings from neuroscience are being applied to the world of finance. This is not surprising as neuroscience has plenty to contribute to our understanding of the decision-making process and the financial decisions we make are among the most important.

Expanding our understanding of financial decision-making and how to develop a ‘risk mindset’ can help protect organisations against the type of market booms and busts that plague economies around the world.

Improving financial decision-making

Poor financial decision-making can be damaging at both a personal and a professional level – creating stress in the home and insecurity at work.

Unsurprisingly, low financial literacy levels are a major contributing factor to this; but our own understanding of how we make decisions also affects our decision-making.

Most of us believe that we are able to keep our emotions in check; that we are able to put feelings, emotions, and memories to one side and just base our financial decisions on the cold hard data – the numbers.

Neuroscience has shown us that the brain doesn’t work like that. In fact, our emotions play an important role in decision-making. Consider an occasion when you have been resolute in a decision, but been persuaded otherwise after a talk with a friend, colleague, or family member; emotional reasons often force this change of mind.

When this tendency to make emotional decisions is combined with an increasingly complex financial landscape, where the number of choices for financial products and services is mind-boggling, we begin to understand the risks involved.

Financial service companies need to improve the literacy of their customers. In the past there has been a sense that financial organisations have a vested interest in keeping everything vague and complex, unintelligible to all but a few. But the winning organisations of the future will be educators that simplify their products and services for customers, and raise financial literacy levels.

Recent insights from behavioural economics and neuroscience can assist with designing financial products and marketing campaigns that promote better understanding for customers and employees, encouraging better financial advice, and improving the likelihood of a good financial decision being made.

Developing a ‘risk mindset’

Ensuring that the right financial products are sold to the right people, for the right reasons, and that customers fully understand what they are purchasing, requires a ‘risk mindset’.

This is becoming more necessary as financial regulations become tighter around the world, and financial organisations start to repair the image problems they have experienced in recent years.

But it takes more than just paying ‘lip service’ to regulations; it is about bringing real value to the customer experience.

With the aid of neuroscience and a better understanding of the decision-making process, organisations can:

Create a culture where the ‘regulator’ mindset is adopted in a constructive way, using principles that underlie the regulation rather than just blindly following the letter of the law.
Re-design incentive schemes less likely to result in mis-selling
Develop structured processes and a common language that all areas of the organisation can use to focus on the customer
Adapt existing products and services to have a positive impact on the customer experience
Foster collaboration and change between and within traditional organisational ‘silos’

Dave Ramsey wrote a book called The Legacy Journey: A Radical View of Biblical Wealth and Generosity. I like this book because it discusses how money is from God, and we are therefore His stewards.

Some will try to convince you that money is inherently evil.

Your Financial Legacy Starts With Building A Strong Financial Foundation

Financially helping others is your end goal. But, you can’t do that if you are in financial trouble. Therefore, your first step is strengthening yourself money-wise so you can assist others. With a secure foundation, you can be a great benefit to people in need. For example, you must stand on higher ground before you can lift someone else.

Giving generously to charity is difficult at this point because you are focused on conquering your debt and mastering your spending habits.

Mastering your spending habits is often complex, but a simple idea and not always easy to employ is paying yourself first. Some attribute consistently saving a percentage of everything you make as the most important financial habit. A second critical practice Dave teaches living by a budget, and the rich are not left off the hook because they are not living paycheck to paycheck.

Beating debt requires discipline. For example often, financial discipline means looking at money and possessions differently. Furthermore, shopping cannot be your stress reliever. Similarly, if paying yourself first is the most important financial habit, the second greatest attitude is contentment.

Step Two: Create A Vision For Your Life And Family

Every family and individual need a vision. For instance, a clear and sharp vision will bridge the gap between where you are and where you need to arrive.

Many people are stressed out and can’t sleep because of crippling debt. Similarly, always fighting with your spouse over money problems is draining on a marriage. As a result, the constant stress and fighting blocks you from concentrating on your vision and dreams.

The Power of Giving

Dave strongly emphasizes paying tithing to your church.

Giving 10 percent of your income to your church changes you. It prepares and softens your heart and magnifies your power to give. Dave attributes the lavish Christmas parties he throws for his employees as a result of tithing. Tithing turned him into a generous giver.

He says giving to the kingdom of God is the greatest investment you will make. However, there are many ministries and charities you could donate to, but not all of them are worthy of your hard earned money. Therefore, he suggests you research them like you would any business deal. For example, many ministries and charities manage their money and resources horribly.

If you are wealthy should you give a mile wide or a mile deep?

I think the best strategy is to give a lot to one or a few so you can make a greater difference. However, if you are rich, spreading your money out to many is tempting. Additionally, even the financially free do not have an unlimited stash of charity cash to give away.

Managing your wealth, no matter how big or small, is a cumbersome task. Your financial advisor helps to keep your money safe while making it work for you. Before you start working with someone, ask them these important questions.

What Certifications Do You Have?

You need to know what licenses and certification your financial advisor has. Most of the top consultants are certified public accountants, fund specialists, consultants, or analysts. Some even carry a Juris doctorate and insurance licenses. While everyone has to start somewhere, you want to work with a firm that has extensive experience in the field.

What Safeguards Are in Place to Protect Assets from Fraud?

Your assets need to be protected by a reputable custodian. When you ask about safeguards, you should also ask about any infractions he or she has received in the past both with the firm and as an individual. To provide you with the best service, your financial advisor should be a fiduciary.

Consultants with a strict code of ethics have standards that they share with their clients. However, no matter their standards, they should be in compliance with Financial Industry Regulatory Authority, state and regulatory agencies, and the Security’s and Exchange Commission.

What Are Your Fees?

When it comes to fees, your counselor should be 100 percent transparent. He or she needs to explain his or her exact fee structure, so you understand how you are paying. Some are fee-only, meaning they provide a flat rate for services rendered.

Some investment consultants charge a commission fee. That means they make money off each product you purchase to help your investments grow. It is important to know which one you are working with, or if you are with someone who charges a fee in addition to earning commissions.

What Access Do You Have to Earning Reports?

As your financial advisor, he or she should have direct access to the top holdings of where your investments are. He or she needs to be able to tell you immediately what the earnings report is anytime you call.

At the very least, he or she should be able to educate you on your holdings before any investment of assets. By educating you on available options and what assets are invested, you can better understand what the consultant suggests.

How Often Do You Communicate

When it comes to letting you know how your money is doing, the counselor should be open to communication. He or she should send out weekly announcements about the market. Also, you must be informed of trade notifications immediately and receive an explanation on every buy and sell option. Most firms also send out information about their monthly investment outlook as well as a quarterly outlook. Brokers also offer to keep their customers informed with educational information and fact sheets.

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