Money as a parachute

The human brain loses its rational footing in the face of uncertainty.

In an experiment, subjects were told how many red cards and black cards were present in a pack, so they could calculate the probability of drawing a particular colour. In a second setting, subjects merely knew the total number of cards – not how many red or black ones there were. All along, their brains were imaged.

When they played the first game subjects made rational decisions. In the second, uncertain game, the players’ amygdala lit up. The amygdala is the seat of fear and emotion in our brain – both of which deteriorate our ability to make rational decisions.

Money is our parachute in times of disaster. If a car is destroyed in a flood, with enough money, it can be replaced. A serious medical diagnosis, can be treated with enough savings. Without this cushion, a single disaster is enough to send people into a vicious cycle. The resulting uncertainty leads to bad decisions, which cause more financial difficulty, spiralling downwards into a poverty trap.

For all its shortcomings, money is the custodian of our certainty. In the face of the unforeseen it can shift shape, satisfy the need of the hour and prevent us from entering a vortex of bad decisions.

 

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