From: Wade T. Smith (email@example.com)
Date: Tue 17 Jun 2003 - 22:15:13 GMT
June 17, 2003
Brain Experts Now Follow the Money
By SANDRA BLAKESLEE
People are efficient, rational beings who tirelessly act in their own
self-interest. They make financial decisions based on reason, not
emotion. And naturally, most save money for that proverbial rainy day.
Well, no. In making financial decisions, people are regularly
influenced by gut feelings and intuitions. They cooperate with total
strangers, gamble away the family paycheck and squander their savings
on investments touted by known liars.
Such human frailties may seem far too complicated and unpredictable to
fold into economic equations. But now many neuroscientists are
beginning to argue that it is time to create a new field of study,
These researchers are busy scanning the brains of people as they make
economic decisions, barter, compete, cooperate, defect, punish, engage
in auctions, gamble and calculate their next economic moves. Based on
their understanding of how fluctuations in neurons and brain chemicals
drive those behaviors, the neuroscientists are expressing their
findings in differential equations and other mathematical language
beloved by economists.
"This new approach, which I consider a revolution, should provide a
theory of how people decide in economic and strategic situations," said
Dr. Aldo Rustichini, an economics professor at the University of
Minnesota. "So far, the decision process has been for economists a
Dr. Jonathan D. Cohen, a professor of cognitive neuroscience at
Princeton, agreed. "Most economists don't base their theories on
people's actual behavior," he said. "They study idealized versions of
human behavior, which they assume is optimal in achieving gains."
To explore economic decision making, researchers are scanning the
brains of people as they engage in a variety of games designed by
experimental economists. The exercises are intended to make people
anticipate what others will do or what others will infer from the
person's own actions.
The games also reveal some fundamental facts about the brain that
economists are just beginning to learn and appreciate:
¶In making short-term predictions, neural systems tap into gut feelings and emotions, comparing what we know from the past with what is happening right now.
¶The brain needs a way to compare and evaluate objects, people, events,
memories, internal states and the perceived needs of others so that it
can make choices. It does so by assigning relative value to everything
that happens. But instead of dollars and cents, the brain relies on the
firing rates of a number of neurotransmitters — the chemicals, like
dopamine, that transmit nerve impulses. Novelty, money, cocaine, a
delicious meal and a beautiful face all activate dopamine circuits to
varying degrees; exactly how much dopamine an individual generates in
response to a particular reward is calibrated by past experience and by
one's own biological makeup.
¶Specific brain circuits monitor how people weigh different sources of
rewards or punishments and how they allocate their attention. A region
called the anterior cingulate reacts when people make mistakes or
perform poorly; some neuroscientists say it also registers gains and
losses, financial and otherwise. A small structure called the insula
detects sensations in the body. It is also involved in assessing
whether to trust someone offering to sell us the Brooklyn Bridge.
These structures and neurotransmitter systems are activated before a
person is conscious of having made a decision, Dr. Cohen said.
In a study published the current issue of the journal Science, Dr.
Cohen and his colleagues, including Dr. Alan G. Sanfey of Princeton,
took images of people's brains as they played the ultimatum game, a
test of fairness between two people.
In the ultimatum game, the first player is given, say, $10 in cash. He
must then decide how much to give to a second player. It could be $5,
the fairest offer, or a lesser amount depending on what he thinks he
can get away with. If Player 2 accepts the offer, the money is shared
accordingly. But if he rejects it, both players go away empty-handed.
It is a one-shot game, and the players never meet again.
Most people in the shoes of Player 2 refuse to take amounts under $2 or
$3, Dr. Cohen said. They would rather punish the first player than feel cheated. "But this makes no economic sense," he said. "You're better off with something than nothing."
Brain images showed that when players accepted an offer they viewed as
fair enough, a circuit in the front of their brains that supports
deliberative thinking was activated.
But when they rejected an offer, the insula — which monitors bodily
states, including disgust — overrode the frontal circuit. The more
strongly the insula fired, the more rapidly the person rejected the
offer, Dr. Cohen said. Moreover, the insula fired well before the
person pushed the button to refuse an offer.
Economists can use this finding to quantify the contribution of emotion
and deliberation in making decisions, Dr. Cohen said. It is possible to
calculate how much emotion goes into evaluating the worth of economic
activities and to study the neural underpinnings of bargaining when
people don't want to let others take advantage of them.
Dr. P. Read Montague, a neuroscientist at Baylor University in Houston,
is using gambling tasks to identify individual differences in
willingness to take monetary risks. Bullish investors have different
patterns of dopamine release compared with bearish investors, he said.
And in a game of mutual trust, women's brains show a big dopamine or
reward response when they are trusted by others; there is no such
response in men's brains.
At other universities, neuroscientists are exploring brain activity
aroused in various economic games. In the prisoner's dilemma, which
tests a person's willingness to cooperate or defect, players show a
particular pattern of neural firing before they betray another player.
Cooperation is captured in dopamine flows. Similarly, it is possible to
trace circuits activated when people anticipate making or losing money,
decide to trust a stranger or punish freeloaders in a game of sharing
The brain is particularly responsive to unexpected or unpredictable
rewards, said Dr. Gregory Berns, a neuroscientist at Emory University
in Atlanta. When uncertainty is high, as in gambling situations, the
brain can get high on dopamine and even become addicted to it.
Expectations alter economic experience. It feels better to get nothing
when you expect $10 compared to getting nothing when you expect $90,
Dr. Montague says the brain seizes on patterns and deludes itself into
thinking that short sequences predict long ones. For example, after
flipping three tails in a row, many people expect the next toss to be
heads. By contrast, if a stock does well two quarters in a row, they
expect it to continue doing well. Such intuitions lead people to adopt
a false sense of confidence and tolerate losses for longer than they
should, he said.
Neuroscience may shed light on all sorts of economic behavior, said Dr.
George Loewenstein, an economist at Carnegie Mellon University in
Pittsburgh. "Under the influence of powerful emotions or drives, people
often end up doing the opposite of what they think is best for
themselves, even at the moment of acting," he said.
For example, many people will choose a small reward that arrives soon
as opposed to a larger reward that arrives later. The future is
uncertain. Why wait?
For now, neuroeconomic experiments tell more about individuals and
small groups than about markets and economies, said Dr. Colin Camerer,
an economics professor at the California Institute of Technology and
author of a new book, "Behavioral Game Theory."
But plans are afoot to study the brains of many people in scanners
linked by the Internet as they play economic games, Dr. Camerer said.
The stock market is a reflection of decisions being made by millions of
brains. Eventually it should be possible to study groups of brains to
unravel mysteries about the formation of market bubbles and why they
break. Or why people continue to spend money when the stock market
falls. Or whether tax cuts will have a bearing on what people do.
"Your dopamine system plays off my dopamine system," Dr. Montague said.
"You buy, I buy, I worry about you, our systems become entrained. You sell, I sell and so on. It may be possible to get to the bottom of this behavior."
Copyright 2003 The New York Times Company
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