A recent report by the University of Birmingham found that over 40% of adults are struggling financially, with 1 in 8 saying they find it quite or very difficult to get by (McKay et al 2022).
When you’re feeling anxious about your finances, you might find yourself staying up late into the night, looking for solutions. However, too little sleep could hamper our ability to solve problems and make prudent financial decisions. In this article we look at the relationship between sleep and financial decision-making, and how to set yourself up for success.
How can lack of sleep impact risky financial decision-making?
Most of us are all too familiar with the impact of short sleep on alertness. A bad night can make it harder to concentrate, and make us less vigilant, slowing our reaction time. Most financial decisions are not made under time pressure though, so how else does sleep play a role in our decision making?
Researchers tested volunteers’ ability to make money using a game designed called the Iowa Gambling Task. In this task, participants were asked to try and make as much money as possible by choosing a card from one of 4 decks (A, B, C and D), 100 times. Each card either won or lost money. Unknown to subjects at the start, two of the decks were weighted to give higher gains but even higher losses (e.g. A and C). Choosing a card from the other two decks (i.e. B and D) meant smaller wins, but even smaller losses. Most healthy people quickly learned to avoid the higher risk decks and chose cards from the lower risk decks so that by the end of the game they made a profit.
After two days and nights without any sleep, participants behaved very differently. Sleep-deprived players chose more cards from the high risk decks as the game progressed, and therefore lost money overall (Killgore et al 2006).
It seems that when we’re sleep deprived, we not only make riskier decisions, but we’re less likely to be able to change our pattern of behaviour when those decisions result in a loss. This is called ‘feedback blunting’. In other words, lack of sleep can make us more likely to throw good money after bad. Sleep deprivation has been linked to more impulsive behaviour, and lower self-control.
The older we are, the more vulnerable we become to the impacts of sleep debt on decision making. More recent research suggests that there may also be sex differences in how sleep deprivation influences our appetite for risk (Lim et al 2022). In one study, when sleep-deprived women were asked to GAIN as much money as possible they tended to become more risk averse, whereas when sleep-deprived men were asked to LOSE as little money as possible they choose to make riskier decisions.
Could more sleep help us to make a smart investment?
If you’re thinking that your financial decisions are more complicated than choosing a deck of cards, you’re absolutely right. Another study from the University of Florida involved more complex financial decision making. Over 700 entrepreneurs were interviewed about their sleep habits. They were then asked to evaluate a series of business plans, from best to worst. These business plans had already been ranked by a (well-rested) panel of industry experts. The entrepreneurs who claimed that they slept well were better able to identify the more commercially viable business opportunities than the entrepreneurs who didn’t sleep well (Gish et al 2019).
Could more sleep help us to find more creative financial solutions?
Sleep is an incredibly active time for the brain. One of the functions of sleep is to consolidate new memories. As we do this we can make links between new content and older long term memories, which can mean that we sometimes wake up with a solution to a problem which eluded us during the day. In one study, good sleepers were more likely to discover a hidden shortcut to a numerical problem than those who stayed awake (Verleger et al 2013).
The links between financial stress and sleep
While sleep undoubtedly has a protects our cognitive abilities, the big challenge is that when you’re under financial pressure, it can become harder to fall asleep, or to stay asleep. For example, during the pandemic, around 50% of the population found it harder to sleep, but this rose to 62% for those experiencing financial difficulties (Kings College 2020).
Sleep and stress have a two-way relationship. Lack of sleep makes us more vulnerable to stress, and stress makes us more susceptible to poor sleep.
When we feel stressed, it is not only our emotions that are affected. Stress sparks a physical and mental reaction too, called the ‘fight or flight’ stress response. We narrow our attention towards the perceived threat. In other words, we find it hard to think about anything else, and can ruminate on our worries and the possible consequences of financial hardship.
From a physical perspective, we unleash the stress hormones, adrenaline and cortisol, which fire up the body for action. Our muscles tense, we release glucose, we increase the heart rate and blood pressure. This is a response which is adapted to help us move away from predators. Unfortunately, this action-oriented response is not a great defence against financial threats; we cannot fight a mortgage demand in the same way as a sabre-toothed tiger. The result of this biological ‘firing up’ in response to stress means that we can find it very difficult to switch off. Even when we do fall asleep, we sleep lightly, and are more likely to wake up during the night.
What else can affect your sleep?
Fortunately, when it comes to controlling the timing and quality of our sleep, we have three independent systems which play a role. Even if our stress system (#3) is on high alert, we can influence the other two systems to coax our mind and body into slumber…
1. Circadian rhythm, or body clocks
Our bodies are programmed to operate on a 24 hour cycle, which closely follows the light-dark rhythm of the sun. By waking up at the same time each day, we help our internal clocks to anticipate sleep 16 or so hours later. A regular routine helps the body work efficiently because all of our internal clocks are in sync. We have a master clock which is sensitive to bright light. Seek out bright light in the morning and dim the lights in the last hour and a half before bed.
2. Sleep pressure
The longer we’ve been awake, the more drowsy we feel. To use this ‘sleep pressure’ to sleep more soundly, only get into bed when you’re feeling sleepy. This might sometimes mean going to bed a little later than normal. Try to avoid caffeine 6 hours before bed, since this can interfere with sleep pressure. Exercise helps us to build up a healthy sleep pressure.
Ways to get a better night’s sleep (when you’re stressed about your finances)
1. Focus on what you can control
Set aside 15 minutes every day, or a few times a week, to write down everything that is worrying you. When you have a long list of things, work through them and divide them into things which you can influence and those which you can’t. Try to identify one small action you could take for the ‘can influence’ category. For example, if you’re worried about not being able to cover the next monthly payment for an outstanding debt, then you could contact the company you owe money to and renegotiate the terms. Plan a time in your calendar that you will take this action the following day. Taking action will make the worry less burdensome.
If you’re worried about something more general, such as rising inflation, acknowledge it, but draw a line through it - try to focus on the issues which you have a direct influence over. Use your worry list to pull together a plan for the following few days.
It’s normal to occasionally be concerned about your finances, but if you’re struggling to cope with your worries for several weeks, consider scheduling an appointment with your doctor, or one of the financial support organisations listed in the section below.
2. Pause before you make important decisions; or decide when you’re well rested
As we’ve discussed above, sleep can help us to solve problems creatively and make more rational decisions. If you are facing some important decisions, always try and build in time to sleep on it. After a few days you may see things from a different perspective. Schedule your key decisions for a time in the day and week that you feel well rested, such as early in the week, in the late morning - rather than when you’re tired on a Friday afternoon!
3. Find stability: stick to a routine
If your mind is unsettled by worry, you can create a sense of familiarity and reassurance by following a regular daily routine. This is especially important in the last hour before bed. Try to repeat the same activities in the same order as you get ready for bed. Waking up and eating your meals at a similar time each day will also help your internal rhythms to work together efficiently.
Who can help me with financial decisions?
Citizens Advice is a network of independent local charities which offers confidential advice online, over the phone, and in person, for free. You can find out if you are eligible for grants and benefits, managing debt, and legal advice.
Other organisations offering helpful advice include:
Money Advice Service, or call 0800 138 7777 from Monday to Friday, 8am to 6pm
National Debtline, or call 0808 808 4000 from Monday to Friday, 9am to 8pm
StepChange Debt Charity, or call 0800 138 1111 from Monday to Friday
This article was written for Bensons for Beds Sleep Hub.