Looking for the Effect of Emotion in Economics

Yes, that classic dilemma: From a perch above, you see a train rushing toward a bridge on which five people are standing. If the train proceeds unimpeded, all five will certainly die. Oh, but wait: There happens to be standing next to you a person of generous figure. It is within your power to push this person onto the train’s path, thereby stopping its progress and saving the lives of the otherwise doomed five.

So. Would you do it?

If you are among the majority of respondents to this question, the answer is “No.” (Read more about this in our interview with Daniel Kahneman.)

However, pose a similar question with slightly altered circumstances — say, the five stand on the bridge, while one person is on the other branch of a switch in the tracks to which you can reroute the train by throwing a lever—and most would agree to act.

While, logically speaking, the first scenario involves saving five lives by taking one, logic is not what governs the majority mindset. There is an emotional component to the dilemma: to push someone over equates with murder. Yet frame the action at a more distant remove — not pushing a person, but throwing a lever — and many will change their answer; the emotional component has been muted, even if the logical result is the same.

Extrapolating outward from these scenarios, a student of psychology might find ways to diagnose the discrepancy and apply it to behaviors in everyday life. A student of neuroscience might observe on an functional MRI which parts of a subject’s brain are most active, tracing blood flow through varying oxygen levels when the question is posed. But what of the student of economics?

The gradually burgeoning field of neuroeconomics suggests that economists also have something to learn from psychological precepts and brain scans. People do not always act logically. Emotion can play a part in our decision-making; sometimes, even, it figures as the dominant factor. In the example above, key parts of the frontal and parietal lobes linked to feelings of fear and grief flare to life in subjects’ brain scans when the possibility of pushing another person down is raised, while the posterior cingulate gyrus also shows heightened activity as a center of emotional processing and resistance.

According to Professor Colin F. Camerer of the Department of Behavioral Economics at Caltech, at the very least, the study of neuroeconomics takes economic reasoning from the realm of inferred behavior — where traditional economics would have it placed — to that of observable phenomena, attitudes visibly cued in the brain: “Such values are directly observable.”

Observable phenomena derived from neuroscientific tools, whether the fMRI (functional magnetic resonance imaging), EEG (electroencephalogram), or TMS (transcranial magnetic stimulation) studies serve to confirm, in Camerer’s view, lessons drawn from behavioral economics: “loss-aversion, crowding-out of intrinsic motivation, overreaction to rare events, utility from ‘cashing in’ or ‘realizing’ capital gains and losses, and reference-dependence.”

It is not a one-way track, though, between neuroeconomics and traditional economics. Nathaniel Daw, an assistant professor of neural science and psychology at NYU’s Center for Neuroeconomics, emphasizes that his studies have benefited greatly from the work of traditional economics. “This is what economists have given to us,” he says. “The right definitions, and theories, and equations that allow us to study how the brain accomplishes these very abstract, subjective, and complicated behaviors.”

In the last five years, says Camerer, neuroeconomics has shed light on how “mathematical computations being made in the brain are more closely linked than ever to actual choices, and to detailed recordings. The emphasis on computation takes a lot of the mystery out of trying to interpret fMRI activity as part of a circuit; it also enables results to ‘add up’ across different studies nicely; and it forces people to articulate exactly what a vague construct is.”

Abstract problems whose methods and results already are known can be mapped to specific physical sites in a brain attempting their solutions. In contrast to a folk conception of the mind, neuroeconomics binds our understanding of the ineffable to the earthbound.

Might the rational actor theorem on which traditional economic theory depends not prove to be its own sort of folk conception? Within each of us, suggests author David Krueger in his book, “The Secret Language of Money: How to Make Smarter Financial Decisions and Lead a Richer Life,” there is “mind” and “brain,” the reflective and the reflexive. The reflective mind correlates to the prefrontal cortex and temporal lobes where complex decisions are reached, while the reflexive limbic areas, insular cortex, striatum, and amygdala house our emotions.

Emotion can “hijack” the rational brain, according to findings cited by Krueger, cutting off access to “the brain software we need for long-term analysis and reasoned decision-making.” The resulting chemical signals can lead a person to feel as if the body itself is in mortal danger.

Conversely, an economic “win,” or uptick in profit, has been observed by neuroeconomists to correspond to the same emotional centers as those responsive to addictive drug use. In his book, “Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich,” author Jason Zweig goes so far as to label the respective brains of someone making money and someone high on cocaine “indistinguishable.” Whether flooded by fear or greed, the brain works differently under the influence of emotion.

“It is more evident than ever that the economics profession is extremely conservative about trying out new methods or underlying constructs,” Camerer says. “The idea of emotion plays almost no role in economic analysis, amazingly enough.” In the dance between the efficiency and inefficiency of global markets, neuroeconomics effectively bolsters the beliefs of economic behavioralists, whose theories allowing for emotional (or irrational) action’s role in swaying markets first gained widespread attention following the crash of 1987.

Regarding the recent financial crisis, Camerer states that neuroeconomics has “nothing special to say,” choosing to view the downturn through the lens of “an Agatha Christie novel in which everyone is guilty.”

“Emotions, greed, blind extrapolation of housing prices, and opaque institutions with slippages in regulation all played a part,” he admits, while moving quickly past the assumptions underlying classical economics when he cites emotions as a cause. The social science is clearly fallible, as evidenced by the collapse of financial systems around the world. Perhaps with the advent of neuroeconomics, studying the brain and the effect of emotions on decision-making will help provide stability — and sense — to the future of our finances.

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