Is money more instinctual than cognitive?

On Financial Therapy

By Rick Kahler MS CFP®

My research in psychology, along with 35 years of experience working with people and their finances, suggests that how we handle money is more instinctual than cognitive.

It’s more a factor of our brains’ hard-wiring than it is learned intelligence. Apparently, some people are just wired to do money well and others are not.

This can sound like a complete copout. The idea that you either have the money gene or you don’t seems simplistic. Yet I believe there is some truth to it.


Researcher and educator Russ Hudson finds that two centuries of data suggest every human being has three basic instincts that are necessary for survival: social (for getting along with others), sexual (for extending ourselves through generations), and self-preservation (for maintaining our physical life and functioning).

For most of us, these three are not equally balanced. One tends to be dominant, a second supports the dominant one, and the third and weakest one typically creates a blind spot. The dominant and weakest instincts give us the most trouble.

Evidence supports the idea that those with a dominant instinct of self-preservation tend to instinctually be successful savers. They are the people who find it relatively easy to, in the words of the late Dick Wagner, “Spend less, save more, and don’t do anything stupid.”

This doesn’t mean they have a good relationship with money; that they sleep peacefully at night, don’t worry about money, or are not obsessed with money. It doesn’t mean they are happy. But it does mean they tend to be frugal, which is the common denominator of accumulating wealth. They understand instinctually that you can’t spend more than you receive if you are going to thrive and prosper financially. Living life on the edge or focusing on the welfare of others is instinctually foreign to them.


On the other hand

Someone with a dominant social or sexual instinct may be living hand to mouth, but be blissfully happy doing so. What’s instinctually foreign to them is learning to manage money prudently and take care of themselves financially.

As Jonathan Clements recently wrote in his HumbleDollar blog, “Why is change so difficult? Improving behavior is toughest when it means bucking our hardwired instincts. Intellectually, we may know we should exercise more, lose weight and save more—and yet our instincts keep telling us to stay on the couch, eat Cheez Doodles and shop online.” That’s why more financial education or discipline isn’t enough to motivate most Americans toward finding financial wellness.

For those who don’t have self-preservation as the dominant instinct, the enormity of learning to practice more self-preserving financial habits can feel depressing and hopeless. Yet it is certainly possible. It just isn’t going to be easy.


One approach that may be helpful is to get assistance and support from others. Clements says he has come to believe the best thing to do is tell friends about your financial goals like saving money for a down payment on a home, paying off a debt, or increasing your retirement plan contributions. This can help motivate you to commit to following through.

Announcing an intention to friends with the hope that the shame of not following through will motivate you to create a new behavior may work for a few. Yet for most, it probably won’t help to change a hard-wired instinct.


A better idea might be finding and reporting  to an accountability partner who would kindly, without scolding or shaming, help motivate you to establish a habit.

Even better may be engaging a financial therapist to help you with the hard work of cultivating new instinctual behaviors.


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One Response

  1. “You can’t have your cake and eat it too.”

    As sensible adults, we understand cognitively the truth of this old adage. If there’s a piece of cake on my plate, and I eat it all today, I won’t have any cake left for tomorrow.

    Emotionally, however, we would really like to eat all the cake today—and also have cake left for tomorrow.

    The same is true when it comes to investing. Even people who have mastered the skill of saving and investing would like to have their money make maximum returns with little to no risk.

    Most of us cognitively understand that this is not reasonable, and that the higher the return the higher the risk. High returns are the compensation one gets for taking an increased risk. Low returns are synonymous with low risk.

    This makes intuitive sense, until we add in some actual numbers and the emotional component. For example, today you can earn 1.75% on a one-year Certificate of Deposit. That rate is guaranteed for one year, and then you have to purchase a new CD at the prevailingrates, which do fluctuate. Just three months ago that rate was near 3%. Three years ago it was around 1%. With those low rates, the risk on a CD is correspondingly very low, and it’s almost zero if your account balance is under $250,000 because it’s insuredby the FDIC.

    If and when you need to start withdrawing a monthly income from your CD’s, you face a conundrum. Let’s say you are 60 years old and have saved $600,000 in CD’s. You need a steady income of a flat $18,000 a year, which represents 3% of the initial $600,000 balancein the account. If the CD’s are paying 1.75%, that means you will deplete your principal by at least 1.25% a year for the first year and by increasing percentages over time. At age 100 you will have $170,744 left.

    Suppose you were able to earn 5% a year in a diversified portfolio of asset classes on that same $600,000, also beginning at age 60. With the same $18,000 a year withdrawal, at age 100 you would have $2,050,000 left—over ten times as much as with the CD’s.This means you could have enjoyed a steady annual income of $33,500, almost double that from the CD’s, to have the same amount left as with the CD’s. That’s a significant increase and could make the difference between a retirement of abundance or one of scarcity.

    When I present this data to a class on investing and ask, “Who wants the guaranteed lower income of the CD?” usually no hands go up. When I ask, “Who wants a chance to double the income?” I see most all the hands in the room going up. Nearly everyone wouldprefer to have twice the amount of “cake.”

    But what are the risks if you want to earn 5% and potentially double your income? The short answer is you need to be comfortable opening your account statement and seeing a 25% decrease in value in any one year. Being emotionally comfortable with such fluctuationis tough—even when you understand cognitively the strong probability that you will have much more money in the long term when you accept that risk.

    The bottom line? There is is no way to count on being able to have your investing cake and eat it too. To provide a strong probability of having sufficient income/cake to meet your needs in the long term, it’s essential to accept the risk that from time totime the supply of cake in the investment “bakery” will fluctuate.

    Rick Kahler CFP


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