Money This Is Your Brain On Money Matthew Herper,
12:00 PM ET
Six years ago, Stanford brain scientist Brian
Knutson accidentally set neuroscience and economics on a collision
course. Knutson wanted to use MRI scanners--the same devices used in
medical diagnosis--to literally peer inside people's heads as they
experienced intense emotions. He tried showing volunteers pictures of
nude and decapitated bodies. But those reactions paled compared with
what happened when he offered people cash.
In 2000, Knutson published the first paper
using magnetic resonance imaging to photograph what goes on in the
brain as people deal with money. Within a year, his findings and others
had given birth to a new field called neuroeconomics. Neuroeconomics
seeks to replace the abstract, hyper-rational creatures that populate
tradition economics with real--sometimes irrational--people.
Neuroeconomists use devices, like MRIs, to observe the behavior of real
people buying and selling things.
"You can actually get inside the black box," says Knutson.
His paper gave neuroeconomics its first real
surprise finding. Traditional economics predicts that people should use
money to acquire things that might make them happy. Money--in and of
itself--shouldn't make people happy. But Knutson found more primal
forces at work. Offers of cash caused a surge of dopamine in a tiny
piece of neural machinery called the nucleus accumbens--a structure as
ancient as backbones that plays a key role in addiction. The surge
wasn't caused by a wad of cash already in people's back pockets, but
instead by the opportunity to make some easy money.
"It helps explain why people have such bizarre
attitudes toward money," says George Loewenstein, an economist at
Carnegie Mellon University. "According to standard economic theory,
money is a means to an end. When you get money, you shouldn't
experience immediate happiness. What all the scanning research is
showing is that people get immediate pleasure and pain from obtaining
and losing money."
Armed with MRI scanners that measure blood
flow in the brain and carefully structured games involving playing
cards and real cash, both neuroscientists and economists have been
watching what actually happens when people make economic decisions.
Skeptics say the new field has yet to completely upend economic theory
and merely has delivered many small findings at the edges of economic
theory. Some also complain that the neuroeconomists are placing too
much confidence in simplified economic exchanges that cannot reflect
the complexity of real life.
But the studies are a first step to mapping out how the brain deals with money. In a study published in Science
in December, Caltech economist Colin Camerer and colleagues asked why
people tend to be afraid to invest in stock markets outside their own
country. For Americans, this isn't a big problem, because the U.S. is
such a global economy. But it can be a big problem in small nations.
"People tend to be way over-invested in their
own country's stock," Camerer says. "If you're in Brazil or Sweden,
you're way under-diversified."
The Caltech researchers did an experiment with
two decks of red and blue cards. Volunteers were told one deck was
composed of ten red cards and ten blue cards; another had an unknown
mix of red and blue cards. They were told if they could guess the color
of the first card drawn from either deck, they would get $10. Most
people decide to make their guesses about the deck where they know
there's an even mix of red and blue cards.
However, this is one of those odd cases where
logic differs from common sense, because the odds of guessing the color
of that first card are 50-50 whether you know the makeup of the deck or
not. (It may be a little easier to see why if you imagine the deck is
all one color. You have a 50-50 chance of guessing that color
correctly.) If you're experiencing a bit of cognitive dissonance here,
you're not alone.
Our brains literally rebel against this
experiment, and, using their MRI scanner, Camerer and his colleagues
figured out why. A completely different part of the brain is used to
make decisions about the deck where the odds seem knowable--where the
risk can be gauged--unlike decisions about the ambiguous deck. Thus
people, sometimes irrationally, tend to favor markets where they think
they know the risks (say their home country's stock market) and shy
away from places where they don't know the mix.
Camerer and his colleagues went a step
further. Using a database of patients with brain injuries kept by
researchers at the University of Iowa, they found five patients in whom
the relevant brain areas had been destroyed by stroke or other
injuries. These people were just as willing to bet on both decks--an
abnormal response that actually matched up with the odds.
Similar kinds of games, always played with
real money and often using MRI scanners, have shed light on economic
decision making in ways that seem difficult to believe. Researchers at
the Baylor College of Medicine decided to look at how people in an
economic relationship--like an investor and his stockbroker or two
executives negotiating a deal--decided to trust each other.
The Baylor researchers gave one volunteer cash
and let him give it to a "trustee." The trustee was given more money
and decided how much to give back to the volunteer. They repeated the
exchange several times and found that they could pinpoint particular
areas of the brain that turned on when the investor thought the trustee
was, well, trustworthy.
"What do we know about the biology of trust?"
asks Ernst Fehr, a neuroeconomist at the University of Zurich.
"Basically zero. Biologists didn't know how to measure trust, and now
we bring the two disparate worlds together. That's neuroeconomics. It's
as much a contribution to neurobiology as to economics."
Fehr went a step further with the same
experiment, finding volunteers who were willing to take a blast from a
nose spray containing the hormone oxytocin, which is involved in
pregnancy and appears to help facilitate social bonds. The
oxytocin-dosed investors became much more trusting--perhaps too much
so. In fact, some investors continued to give the trustees cash, even
if they were being ripped off.
Other research has sought to measure exactly
how employees react to punishment and reward, why people seem to value
money they've earned over money they're given, and why and how people
lie. Marketers have turned to the new field for insight (see: "In Search Of The Buy Button"), andsuch experiments could even shed light on mental illness.
As MRI technology gets better and experiments
become more nuanced, neuroeconomics stands to gain even more steam.
Critics complain that any good neuroscientist could have guessed many
of the field's results. Brian Knutson, who helped get the ball rolling
in the first place, takes issue with that accusation.
"We can see things smaller and faster than ten
years ago," he says. "We couldn't even divine these findings from
invasive rat research." He adds, "It's happening fast."