The tough economy is forcing many families to make difficult financial choices. How do we make these decisions? Researchers in a new field called neuroeconomics are finding out.
Financial decisions involve a great deal of uncertainty. Ideas of “risk” and “danger” influence our thoughts as we are forced to decide between gambling on a long shot or choosing the security of a sure bet. Understanding how the brain uses information about uncertainty when making decisions, and the brain circuits and chemicals involved in that process, form the basis for this emerging field.
Risk, probability, previous experiences, and social interactions play important roles in our ability to assess available information and make a financial decision. By imaging brains while people play games that test their strategies and behaviors, researchers are learning that:
- Distinct brain regions are activated depending on possible decision outcomes, social cooperation, and reward anticipation.
- Brain chemicals influence an individual’s willingness to trust and can affect a person’s fear of betrayal when making financial decisions.
Mathematicians and social scientists have been studying strategic decisions for several decades through social interaction games that test human behavior. For example, in the 1950s, researchers developed a classic strategy game called the Prisoner’s Dilemma. In this game, two people play the roles of criminals who are interrogated independently about a crime they committed together. If the partners remain silent (cooperate), they both benefit, but if one chooses to testify against the other (defect), harsh punishment may result. Each participant tries to minimize his own punishment without knowing his partner’s intentions. Should he risk trusting his partner, or should he betray him?
In an economic variation on the Prisoner’s Dilemma, each player has an item of worth, but each values the other’s item more than her own. If a player chooses to cooperate, she gives her item to the other player; if she defects she keeps it. Both players benefit from exchanging goods. However, if one player cooperates and the other defects, the first ends up empty-handed and the second takes all.
Using brain imaging tools, researchers are now identifying what happens in the brain when people face these dilemmas. When both players cooperate, a brain region involved in anticipating reward called the striatum becomes active. However, if a player faces off against a computer instead of a person, mutual cooperation does not increase striatal activity, suggesting that the human interaction of the economic exchange is rewarding.
Punishing unfair opponents and donating money to charity are also rewarding, according to imaging research, suggesting that people may have an innate, biological sense of equity. If players are given the option of penalizing their opponents for repeatedly defecting, an economic punishment activates the striatum, but a physical punishment does not. In addition, the more a participant chooses to donate to a charity, the greater the activity in the striatum.
Researchers identified other brain regions involved in determining financial fairness by studying people with injuries or lesions. In the ultimatum game, one player makes an offer to another player who can accept or reject it. Most people with intact brains accept fair offers and reject unfair ones. However, people who have damage in the ventromedial prefrontal cortex, a brain region important in cognitive control, reject more offers than others do. In contrast, when researchers temporarily inactivated the right dorsolateral prefrontal cortex in healthy people, they found that affected study participants accepted more unfair offers.
A hormone called oxytocin also may increase trust in financial exchanges. In the trust game, an investor decides how much money to give to an investment banker. Investors who took a sniff of oxytocin, which is involved in lactation and birth, invested more money than did other investors. However, oxytocin did not affect investor decisions when a random mechanism, rather than a person, determined their return.
Imaging research suggests that oxytocin reduces people’s fear of betrayal. After learning that their trust had been violated in repeated games, investors decreased their investments, and their brains showed increased activity in regions involved in fear (amygdala and midbrain) and arousal (insula and postcentral gyrus). However, those who sniffed the oxytocin spray did not change their investments and did not show brain activity changes.
What about financial decisions that do not involve social relationships? Like people who only play the lottery for the multi-million dollar jackpots, researchers found that animals choose risky options over smaller sure bets when they cannot predict the likelihood of a reward. Furthermore, both human and primate research shows that the striatum becomes more active as the size of an expected reward increases. And in humans, insula activity increases with the perceived risk of a financial decision.
In today’s financial climate, many people are experiencing challenges to their comfort level with risk and reward in their social and financial responsibilities to others. By helping researchers understand these complex human behaviors, neuroeconomics is helping to connect biological and social sciences, offering a view into the evolution of decision-making behaviors, especially those that are uniquely human.