College of LAS « Illinois

Cover Story

Money on the Brain

There’s a logical reason why we sometimes make irrational decisions—it’s how we are wired.

(Continued from page 2)

Brain scans

“I tried to discourage him from pursuing this for his PhD,” says Camerer of Hsu, who ignored Camerer’s warnings about the unproven nature of the field. Hsu only saw a chance to work with the best. Camerer is one of the founders of the field of neuroeconomics and is known both for his prodigious talents and his rebellious nature. He made his name by helping bring credibility to the former fringe field of behavioral economics. He is now doing the same for neuroeconomics.

One of his team’s earliest successes for neuroeconomics was with a scenario called the ultimatum game. Say that Mary has been given $10 that she must divide with Bill. Bill may accept or reject her offer, but if he rejects it, neither of them receives a penny. Standard economic theory predicts that Bill will accept any offer from Mary rather than gain nothing. Yet, that is not what happens. When Mary decides to keep $8 and give him only $2, Bill gets angry and rejects the offer as unfair.

When Bill receives the unfair offer, a debate erupts in his brain, with three areas battling for supremacy. The dorsolateral prefrontal cortex, the part of the brain associated with planning, wants the money; the insula, where emotions reside, is registering disgust; and the anterior cingulate, an area of executive function, tries to resolve the conflict. Whether Bill accepts or rejects the offer depends on the strength of the insula.

This kind of intercranial negotiation occurs with all decisions, says Hsu, and what their neural research will ultimately do is identify the patterns. Admittedly, most of their studies are limited to artificial tasks, such as whether a person wins or loses $10. “Hardly a situation that will alter your life outcome but that is where we start,” says Hsu. “Even fairly simplistic tests can still help identify reactions from which we can extrapolate. How do people react to once-in-a-lifetime risks? How do they react to financial panics?”

Brain scans

The areas most likely to reap the most immediate benefits from neuroeconomics lie at the extremes of human behavior, such as when brain function is impaired through disease, poverty, and aging. For instance, if researchers document the kinds of deteriorations that occur with age, they can also develop a battery of tests that detect whether an individual is becoming more or less risk averse or susceptible to scams, then others could intervene accordingly. It is not far-fetched, says Hsu, to imagine that policymakers may one day use knowledge gained through studies like his to propose paternalistic measures that take into account severe cognitive declines. Individuals with severe dementia may not be able to will all their money to a dog.

At Illinois, Hsu is reaching out to both traditionalists in economics and to researchers in diverse fields, especially psychology, where he formed fruitful collaborations, such as with psychologist Jesse Spencer-Smith. They are studying how facial expressions affect decisions. For example, says Spencer-Smith, “during salary negotiations, will someone swallow the bitter pill of not being offered as much money if they can express their displeasure or if their boss smiles sheepishly while making the offer?”

The real impact of research like Hsu’s, according to Steve Williams, is what it will reveal about human nature. Hsu recently identified the neural region associated with ambiguity—decision making when the odds are unknown. Economists know that people don’t like ambiguity, and what struck Williams as he listened to Hsu describe his work was how difficult that behavior would be to circumvent. “Our aversion to ambiguity isn’t something we can easily overcome through training or education, which is the solution economics typically offer,” says Williams. “It’s biological. We’ve evolved to be hardwired against it. Ming’s work suggests that ambiguity aversion is an essential component of good decision making, whether on Wall Street or in the wild.”

After Hsu’s paper about the orphanage was published, he received a call from the manager of a food bank who said the results resonated with him. The food bank is chronically short of food, the caller said, because people insist on equal portions, which results in waste. That’s not rational behavior, summarized Hsu, but apparently it is human.

12 • 3

By Holly Korab
Spring 2009