Why the power of memory can lead to sound financial choices

Past experiences of saving, borrowing, investing or giving can trigger powerful emotions

The relationship between memory and money can help to guide our financial futures. Getty

Looking back is essential for future planning. Memories serve not only as reminders of pleasant moments but also as catalysts for shaping our future.

Nevertheless, the reliability of our memories begs questioning. Can our past experiences reliably guide our future financial paths? Moreover, how does memory play a role in making sound financial choices?

Unlike other species, humans possess the unique ability to time travel, exploring the past, present, and future.

In a mere instant, if I asked about last weekend, you would mentally retrace your steps and reconstruct a narrative of what you did.

Similarly, if I were to ask about your plans for the coming weekend, you would project your thoughts forward to envision the possibilities. But for now, let us just focus on memory.

Long-term memory has two types: Implicit and explicit.

The first are skills we have gathered throughout life that do not need conscious thought, think tying your shoelaces. Maybe you call it muscle memory.

Our explicit memories can be categorised into two types – episodic memories, which consist of personal life events, and semantic memories, which encompass important facts and details such as our own birthday.

The concept of the memory illusion comes from our explicit memory, which serves as the repository for these life events and information. Unlike routine tasks such as tying shoelaces, our explicit memories are not retrieved as frequently.

Here is an example.

Say you attended a dinner party and you are having a great time with friends. Sarah, your host, makes the most amazing chocolate cake for dessert.

It finishes off a delicious meal with memorable company, memorable conversation and memorable food.

You cannot commit every single detail to memory as your brain simply does not have the storage capacity. Instead, your brain takes elements of the event and commits them to your long-term explicit memory.

As time passes, a friend who was at the dinner party with you that day asks: “Can you remember that dinner party at Sarah’s house?”

Your brain starts looking for mental snapshot it took at the event and pulls them back into consciousness. It reassembles them in a way that makes sense and fills in the gaps and the missing information with a story that works.

This story is a mixture of both real and imagined. You say something like: “Of course, I remember, it was an amazing meal. I remember Sarah’s red dress.” Your friend says: “No, it was blue! I remember it vividly.”

Since your friend is much more confident than you, you accept that you have misremembered and thus unconsciously update your memory. This simple example demonstrates something really powerful.

Our memories, the very foundation of who we are, can change over time. And so we ask uncomfortably, can we be 100 per cent confident in our memories? They feel accurate, but are they?

From an evolutionary perspective, our memory evolved to provide information for making better future decisions.

If I asked you to stick your finger into an electrical socket, I am certain you would say no! This is because our memory of electricity being dangerous, steers our decision now.

Believe it or not, it is a short leap from electrical sockets to the stock market – and the many other dimensions of money life. The relationship between memory and money is profound.

Whether it’s your past experiences of saving, borrowing, investing, or giving – your money memories can trigger powerful emotions. Those emotions are sometimes reliable guides towards the financial future you want, but not always.

And so, as you imagine the future you want, keep in mind that where you have been weighs heavily on where you want to go. Memory triggers feelings and beliefs, but as we have seen before, it is wise to challenge those memories, and to challenge ourselves.

How do we start doing so? Well, starting at the beginning is often best.

Where does your money story begin? What is your earliest memory related to money? What beliefs and attitudes about money have you picked up along the way? And how did those memories affect your decisions today?

Questioning ourselves in this manner gives us the best chance to ensure the money decisions we make are not grounded in a memory illusion, but instead grounded in thoughtful reality.

Sam Instone is co-chief executive of wealth management company AES