Mind Over Money

Emerging Discipline Looks at the Neurobiology of Economic Decision Making

Having given themselves over to the messy emotional forces and stubborn cognitive tricks that complicate our efforts to be rational, many decision scientists are now surveying a new frontier: the biology that underlies economic behavior. In the past several years, a new subfield of research, now termed “neuroeconomics,” has rapidly gained momentum. Research in this emerging, interdisciplinary field is aimed at pinning down the workings in our brains when we buy, sell, bid, negotiate, invest, and gamble.

Collaborative teams of neuroscientists, psychologists, and economists have brought an arsenal of methods to bear on the subject. They include traditional electroencephalogram (commonly known as EEG) recordings, positron emission tomography (commonly known as PET) imaging, single-neuron recordings in primates, measurements of eye tracking and pupil dilation, studies of patients with damage in particular brain areas, and the 400-pound gorilla, functional magnetic resonance imaging. As it has in many other areas of behavioral science, the advent of fMRI, which provides detailed images of the brain in action, has sparked considerable excitement among many decision scientists.

Neuroeconomics also has its critics. Some scientists caution that the current neuro-Zeitgeist wrongly implies that psychological phenomena are not “real” unless they are studied at the physiological level. Others believe excitement over the method is overwrought — that although fMRI’s color pictures of the brain are seductive, the method is producing little theoretically valuable information.

“The problem with neuroscience isn’t that it’s providing us with useless information, it’s that it’s providing us with overwhelming information,” said Jonathan Cohen, director of Princeton University’s Center for the Study of Brain, Mind, and Behavior. “We don’t have rich enough theory to explain the data we’re getting.”

Even the most enthusiastic neuroeconomists are quick to acknowledge that neuroeconomics is in its infancy, and that many hurdles — technical, procedural, and theoretical — remain.

Right now, the most important challenge is to hone methods and create an intellectual community that speaks a common language, said Colin Camerer, a professor of cognitive psychology and economics at the California Institute of Technology and one of the field’s leading figures. For the moment, the biological processes that guide economic behavior remain murky.

“Right now we just know that people are irrational, but we don’t know why,” said Brian Knutson, Stanford University. “Brain imaging gives us the hope of opening the black box and actually disentangling these multiple factors that go into our decisions.”

The standard economic model assumes that people act out of pure self-interest. Yet it is difficult to envision how an economy could function in the complete absence of social phenomena such as cooperation, trust, and reciprocity. Surely the world’s economies would stutter to a stop if people utterly abandoned what we see as our moral obligations to one another. So neuroeconomists are keen to go beyond the confines of the standard economic assumption of rational self-interest to unravel the neural processes involved in such critical phenomena as cooperation, trust, and reciprocity.

In 2001, economist Kevin McCabe, George Mason University, and colleagues found that when people were cooperating with a partner during an investment trust game, activity increased in the anterior paracingulate, an area involved in understanding others’ intentions, and the dorsolateral prefrontal cortex, which is involved in maintaining focus on goals. But these increases in activity were not detected when people were not cooperating, or when they played against a computer.

According to McCabe, this suggests that “cooperation depends heavily on developing the right mindset about the other person. The brain creates these shortcuts to understand features of the environment that have value, like reciprocal exchange.” Even when no one would know if we acted self-servingly, the brain appears to be so strongly wired for cooperation that people do the right thing anyway, just because morality works as a social institution. In a recent study, Camerer and neuroscientist Read Montague, Baylor College of Medicine, put pairs of research participants into two linked fMRI scanners and engaged them in a 10-round version of an investment game similar to McCabe’s.

At moments when participants had to decide what do next — cooperate or break the faith — they had increased activation in the anterior and posterior cingulate. The posterior cingulate is of special interest, Camerer said, because some recent research suggests that it is a way station for decisions that involve moral dilemmas.

But moral obligation notwithstanding, norms of fairness do break down sometimes. When they do, the injured party usually does not go down without a fight.

In a 2003 study, Cohen, Alan Sanfey, now at the University of Arizona, and colleagues tracked brain activity as people played the Ultimatum Game. In their version of the classic test of trust, two people split $10, with one proposing how the money will be divided and the other either accepting or rejecting the proposal. If the proposal was rejected, no one got anything.

The researchers found that most people accepted fair splits but rejected offers of only $1 or $2. Why? For spite. fMRI imaging showed that compared with fair offers, unfair offers triggered activity in the anterior insula, an area linked to anger and disgust. Moreover, people with greater insula activation were most likely to reject unfair offers.

Unfair offers also stimulated activity in the brain’s anterior cingulate cortex, indicating that the offers triggered a cognitive conflict: punish the transgressor or take the money? When people played the game against a computer, unfair offers did not trigger this dilemma — as any Windows 98 user knows, it is futile to try to punish a computer.

Humans are not the only ones who have a fine-tuned sense of financial misconduct — even a monkey knows a raw deal when it sees one. In a 2004 study, Sarah Brosnan and Frans de Waal, Emory University, trained capuchin monkeys to hand a stone to a researcher in exchange for a reward. When one monkey got a juicy grape and the other only got a lowly cucumber slice, the lower-paid monkey went on strike, refusing to perform the task and sometimes even hurling the cucumber at the researcher.

Recent research indicates that like physiological rewards such as food, money itself — not just what we expect to buy with it — is a powerful reward. In a 2001 study, Knutson and colleagues discovered that when people expect to make money, the juices start flowing in one of the brain’s dopamine-rich reward areas, the ventral striatum. And, people’s self-reported excitement about making the money is correlated with this activity. (A German group of neurologists reported in February 2005 that anticipating a windfall also boosted participants’ long-term memory for reward cues.) In contrast, when people actually get money, the brain starts scheming what to do with it; the mesial prefrontal cortex, an area associated with planning, becomes active.

“Economists view money as just a medium of exchange, without intrinsic worth,” said APS Fellow George Loewenstein, Carnegie Mellon University, a leading figure in neuroeconomics research. “This research is supporting the very intuitive idea that people derive a lot of immediate pleasure and pain from gaining and losing and having money.”

The next step, Knutson said, is to understand how the brain balances emotional considerations against more reflective concerns, and to sort out how underlying brain mechanisms participate in a variety of behaviors that are now simply branded “irrational.”

Anticipation of future reward may feel great, but it does not negate the fact that people often decide that a buck in the hand is worth two in the bush. Yet that phenomenon is not linear: $10 now is better than $11 in a week, but if given the choice between $10 in one year and $11 in a year and a day, most people would wait the extra day to get more money.

How does the brain make the trade-off between immediate and delayed gratification? Loewenstein and others have proposed that the brain deploys two separate mechanisms when they evaluate the future: one that is sensitive to very immediate options, and one that is more even-handed about the future.

In a 2004 study, Loewenstein and an interdisciplinary group of colleagues — Princeton neuroscientists Cohen and Samuel McClure and economist David Laibson, Harvard University — reported fMRI findings supporting that idea. When people had to choose between a sum of money immediately and a larger sum later, the brain appeared to mobilize two separate response systems. One, in the evolutionarily ancient, emotionally responsive limbic system, was particularly active when participants chose earlier rewards. “Seize the day!” it pleads. The other system, located in the evolutionarily newer prefrontal cortex, was more active when participants chose delayed rewards. “Let’s think about this,” it recommends.

“Choices about the future are a product of collaboration and competition between these two systems,” Loewenstein said.

There are two competing views of what will come of the new science of neuroeconomics knocking on the door of economic theory, Camerer said. The incremental view is that biological data will merely refine the core ideas of the standard economic model, gently nudging it to be more realistic.

A more radical possibility, he suggested, is that neuroeconomic research — coupled with behavioral research — will lead the field to acknowledge, once and for all, that “the whole apparatus of economics was just derived by a bunch of mathematicians because it’s elegant mathematically.” This view, which Camerer is leaning toward more and more, is that “we’ll erase the blackboard of economic theory.”

So the question remains open: Will classic economic theory stand, more supple for its newfound biological and behavioral underpinnings, or will its rigidity cause it to splinter under the weight of new data? Who knows, but as Knutson suggested, this is not a question that psychologists, neuroscientists, or economists, each with their own agendas, will decide. “It may turn out that the various agendas of these different fields is not the brain’s agenda,” he said.

Further Reading

  • Neuroeconomics general background, from Colin Camerer’s Web site: www.hss.caltech.edu/…/n.html
  • Camerer, C.F., Loewenstein, G., & Prelec, D. Neuroeconomics: Why Economics Needs Brains (in press). Scandinavian Journal of Economics.
  • Knutson, B., & Adcock. A. (2005). Remembrance of Rewards Past. Neuron, 45, 331-332.
  • McClure, S.M., Laibson, D.I., Loewenstein, G., & Cohen, J.D. (2004). Separate Neural Systems Value Immediate and Delayed Monetary Rewards. Science, 306, 503-507.
  • Sanfey, A.G., Rilling, J.K., Aronson, J.A., Nystrom, L.E., & Cohen, J.D. (2003). The Neural Basis of Economic Decision-Making in the Ultimatum Game. Science, 300, 1755-1758.
Observer Vol.18, No.4 April, 2005

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