Maria Inês Padrão
24th March 2025
It’s no secret that humans, contrary to the neoclassical economists’ belief, are not purely rational beings. Humans possess a complexity that rationality alone requires but is further enhanced by emotions.
Thus, I have always been guided by one principle: Understand the mind’s inner workings to master control. This applies to every aspect of life, including decision-making. In fact, the entire spectrum of decisions is rooted in emotion, often ignoring the logic of what would be more rational. If the goal is to reach the best decision, perhaps it’s time to stop and understand the machine that builds it. Only then will we stop being prisoners of the process and become its architects.
“Master the process or you will be just the result”
It is no surprise that the brain keeps shaping itself. It’s also no surprise that most of what we do is based on what we’ve learned, information stored in the hippocampus — the memory center. In fact, the brain is a lazy organ, as we act according to what is most comfortable for us, what is most familiar to us. Our learning then becomes our filter. It is here that we come to realize the importance of introspection, that is so highly recommended to us, to reflect on our past experiences and the beliefs that we end up shaping. To make it easier to understand, let’s take the example of the CEOs who lived through the 2008 crisis. It becomes almost logical to understand that they ended up developing a greater aversion to risk, as they learned in circumstances of great uncertainty. It’s as if their brain mechanism is different from those who didn’t live at that time.
Another area that is also quite interesting to understand is the Amygdala, the part of the brain responsible for processing emotions such as fear, anger, and anxiety. Thus, it is easy to see how it can lead us to irrational financial decisions. Think of times of financial stress, such as an economic crisis. The Amygdala can activate the “fight or flight” response, leading us to panic, sell investments, or avoid promising opportunities out of fear.
When we talk about financial decisions, it is impossible not to talk about the nucleus accumbens. This reward system, which plays a key role in evaluating and responding to reward stimuli, belongs to the area responsible for the release of the neurotransmitter dopamine: a motivating factor. It is, therefore, this area that gives a predisposition to more immediate choices compared to long-term ones.
However, even though we do not have pure rationality, it does not mean that we no longer have rationality. I present, therefore, our friend Prefrontal cortex, one of the areas that most interests investors, responsible for weighing the cost-benefit of different courses of action. Being connected to planning, judgment and self-control, it helps regulate the amygdala’s emotional reactions, controlling impulses and allowing us to make better decisions.
But are we eternally hostages of past experiences, unable to reprogram our minds?
The truth is that not everyone faces the financial market with the same “biological weapons”: while some give in to fear, others activate brain areas that favor strategic decisions. The good news? The brain can be trained. Through neuroplasticity – the brain’s ability to adapt – we can create more rational habits, avoid dangerous mental shortcuts, and strengthen the long-term vision. Strategies such as reflecting before acting, exposing yourself to new experiences, and reevaluating beliefs about money help to reprogram automatic patterns.
It is still interesting to reflect on the importance of emotional intelligence in finances. Not in the cliché way you might expect, but from a perspective I find more intriguing. If we stop to think about it, we can come to the conclusion that impulsive investors can be like teenagers in the brain, dominated by the amygdala, reacting with fear and euphoria to the markets. On the other hand, the more experienced ones, with developed emotional intelligence, strengthen the prefrontal cortex, controlling impulses and making strategic decisions. Thus, we realize that, deep down, investing well is not only about numbers, but also about emotional maturity.
Another thing that worries me is the idea that money is not just a practical resource, but an emotional trigger that moves many people. So, being such a sensitive topic, is the way we process information and react to these decisions biologically different when compared to another topic? The truth is that financial decisions activate brain regions associated with fear and reward, making us more prone to mental shortcuts and impulsivity.
“We are not rational beings who feel, we are emotional beings who think.” – António Damásio
The truth is that there is no denying this nature of ours. And it’s curious how in school we learn about neurotransmissions, brain connections, and how we process new information. But as we grow up, we choose to ignore that biology shapes all of our choices. We separate knowledge into several categories, ignoring that the true understanding of the world requires the complementarity of areas. So, instead of fighting our brain, perhaps we should learn to dance with it, embracing the harmony that helps us regain the control we thought we had lost.