You and I would look at Wall Street and see the epitome
of capitalism, a place where the marketplace, while more manic than in times
past, still drives decisions.
But a group of scientists gathering today for a conference
in Miami would see it differently. They would argue that if you really want to
understand why investors and traders behave the way they do, you need to look
inside their brains.
Meet the neuroeconomists, pioneers of sorts in an
emerging field based on the notion that financial decisions have their roots in
neuron connections. They’re building a science around using brain scans to try
to figure out what’s going on when people choose to chase rewards, or
conversely, avoid risk. They’re also hoping this will help them understand why
people make irrational choices, even when the reasoning part of their minds
seems to know better.
My
brain says you disgust me
Josh Fischman, writing in the Chronicle of Higher
Education details some of the observations neuroeconomists have made during
their brain imaging experiments. For starters, they say that when people reject
what they feel is a lowball offer, a part of their brain associated with
disgust, called the insula, gets active. In fact, it’s more active than the
part of the brain linked to reasoned calculation, suggesting that in that
situation, a person’s negative emotion–to make sure the cheapstake doesn’t
win–trumps a more rational one.
Scientists have also analyzed the brain’s response when
someone feels they’ve spent too much for something. The region of the brain
called the striatum, often linked to rewards, gets particularly active when
people overpay because they’re afraid of losing something.
In short, based on what their brains reflected, subjects
in the research seemed to be more motivated by the fear of losing than the joy
of winning. And that, neuroeconomists contend, could help explain why people
will hold on to losing stocks too long–they want to avoid acknowledging a loss.
Still other researchers, such as Brian Knutson at
Stanford, found that investors with the greatest appetite for risk had a high
level of brain activity in the same section that lights up in an animal when it
finds food. These investors tended to experience boosts in their dopamine
levels, usually associated with anticipating something pleasurable. And it’s
that kind of brain reaction, says Knutson, that can lead to risky behavior.
“By deconstructing why investors get excited, and why
they do what they do” Knutson told Bloomberg’s Nikhil Hutheesing. “we will be
able to design tools that help people make better decisions.”
Reading
minds?
Not everyone’s buying into this. In fact, plenty of
economists are dubious about how much this approach will really teach us about
financial risk and reward. Reading brain scans is hardly a precise science and
skeptics say MRI images are so open to interpretation that a researcher can see
what they want to see and end up drawing simplistic conclusions about something
as complex as human decision-making.
Yet major organizations, such as the National Institutes
of Health and the National Science Foundation, haven’t been skittish about
investing millions of dollars in neuroeconomics research–although their
interest is skewed more toward addictive behavior and why people make bad
choices when they clearly understand the benefits of avoiding them.
It may even be able to provide insight into how elderly
people make decisions. Says Elisabeth Nielsen, of the National Institute on
Aging:
“We’re very interested in decision-making and aging. And
that’s not just health decisions but choices about insurance plans and how to
manage your retirement savings. Are changes in choices related to the
underlying neuorophysiology? Or is it the environment? You won’t know unless
you get input from different sciences and that’s what neuroeconomics brings to
us.”
Why, brain, why?
Here’s
other recent research on how our brain affects our behavior:
There’s
good news and there’s good news: A study at University
College in London found that our brains are wired to want good news. Our
tendency, the research suggested, is to give more weight to positive things
that could happen in the future and discount negative ones. Only when
scientists turned off a section of subjects’ brains were they able to evenly
consider good and bad potential outcomes.
But
the monkeys also became big fans of “Scarface”:
Scientists from Wake Forest and the University of Southern California were able
to improve the decision-making skills of monkeys by implanting a small device
that stimulated the frontal cortex of their brains. This was after their
performance in a matching game had plummeted when they were given a dose of
cocaine. The findings encouraged the researchers that an implant might be able
to one day help people with damage from dementia, strokes or other brain
injuries.
It’s
lonely at the top. But also mellow: Contrary to conventional
wisdom, leaders likely feel less stressed than those who work for them. In
studying baboons, scientists at Harvard found that the stress hormone cortisol
was less prevalent in the primates with higher standing in the troop.
Researchers also analyzed the self-reported anxiety levels of military leaders
and discovered that the higher an officer’s rank, the lower the stress level
they reported. The scientists postulated that it was because the leaders were
able to have more control over their lives.
And
that’s why you don’t eat buckets of ice cream: According to a
study at the California Institute of Technology, the brain relies on two
separate neural networks to make decisions–one that determines the overall
value (the risk versus reward) and the other that guides cognitive control to
make sure you don’t get carried away with potential rewards.
Next
they’ll suggest we leave pheromones on the sidewalk: It
seems that ants can teach us a thing or two about making good decisions.
Researchers at Arizona State suggest that the key to not overloading our brains
with too information is to follow the example of ants and engage in collective
decision-making instead of relying on multi-tasking.
Image source: http://www.sxc.hu/photo/1406618
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