tag:theconversation.com,2011:/au/topics/neuroeconomics-2351/articlesNeuroeconomics – The Conversation2017-05-21T19:49:29Ztag:theconversation.com,2011:article/779942017-05-21T19:49:29Z2017-05-21T19:49:29ZDelivery drones: swooping down to prey on our self-control<figure><img src="https://images.theconversation.com/files/169962/original/file-20170518-12257-tlfh56.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A prototype Amazon delivery drone.</span> <span class="attribution"><a class="source" href="https://images-na.ssl-images-amazon.com/images/G/01//112715/image-2._CR0,8,1340,762_.jpg">Amazon.com</a></span></figcaption></figure><p>On July 25, 2016, while countries including the United States were still <a href="http://www.theguardian.com/technology/2016/jun/21/amazon-google-drone-delivery-new-faa-regulations-obama">expressing regulatory misgivings</a>, the British government graciously gave <a href="http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2188074">Amazon.com access to the UK’s airspace</a>. The stated goal was to explore the practical issues involved in delivering parcels using “unmanned aerial vehicles” – more commonly known as drones. Less than five months later, on December 7, <a href="http://www.theguardian.com/technology/2016/dec/14/amazon-claims-first-successful-prime-air-drone-delivery">history was made</a>: a man in Cambridge, England, made an online purchase of an Amazon Fire TV and a bag of popcorn. Within thirteen minutes a fully autonomous drone carrying both items arrived at his home. While it may not sound like much, this marks the beginning of a transformation, not just of our skies, but also of our ability to make informed consumer choices.</p>
<p>This was the first delivery from Amazon’s Prime Air, which aims to get packages to customers in less than 30 minutes using drones. It’s currently in the early stages of development, but over the next few months Amazon hope to make it available to hundreds of customers within the Cambridge area. Given the speed of their progress, it is not difficult to imagine, <a href="http://www.youtube.com/watch?v=MXo_d6tNWuY">in the not-too-distant future</a>, fleets of automated drones delivering parcels to the grateful hands of thousands of customers all over the UK.</p>
<h2>Drones far and wide</h2>
<p>So what is holding back other countries from allowing delivery drones in their airspace? Is the UK the only country progressive and generous enough to loosen their regulations so that we consumers can be spared the misery of having to wait for more than 30 minutes to receive our purchases? Other than the obvious safety concerns (having swarms of automated drones flying over populated areas), labour concerns (the number of drivers’ jobs that would be lost), or environmental concerns (threats to local wildlife, noise pollution), delivery drones are a great idea, right?</p>
<p>Even if these many issues could somehow be addressed, looking at the impact of delivery drones from a human behavioural perspective, I would put forward another troubling concern.</p>
<p>This relates to how our brains perceive time as a cost and the effect that this has on our choices. As much as we like to think the opposite, our choices, especially the consumer ones, are not completely our own. In reality they’re heavily influenced by factors that we are often completely unaware of. Our brains, as choice-making computers, are constantly seeking a path of least resistance. As a result, time and effort are computed as costs that diminish the <a href="http://web.stanford.edu/%7Eknutson/bad/kable07.pdf">subjective value of prospective rewards</a>. Neuroimaging techniques can actually track how this computation of time as a cost <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.335.150&rep=rep1&type=pdf">affects the brain’s valuation of a reward</a>, such as a chocolate bar. The signals emitted by these computations can even be <a href="http://scholar.harvard.edu/files/laibson/files/time_discounting_for_primary_rewards.pdf">measured and used to predict people’s choices</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/169963/original/file-20170518-12231-1965ueg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/169963/original/file-20170518-12231-1965ueg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/169963/original/file-20170518-12231-1965ueg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=729&fit=crop&dpr=1 600w, https://images.theconversation.com/files/169963/original/file-20170518-12231-1965ueg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=729&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/169963/original/file-20170518-12231-1965ueg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=729&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/169963/original/file-20170518-12231-1965ueg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=915&fit=crop&dpr=1 754w, https://images.theconversation.com/files/169963/original/file-20170518-12231-1965ueg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=915&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/169963/original/file-20170518-12231-1965ueg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=915&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">How subjective value diminishes with time and where this computation takes place in the brain for different individuals.</span>
<span class="attribution"><span class="source">Kable & Glimcher, 2007</span></span>
</figcaption>
</figure>
<p>In the natural world, preference for immediate payoffs is an <a href="http://digitalcommons.unl.edu/cgi/viewcontent.cgi?article=1518&context=psychfacpub">adaptive and efficient strategy</a>. For instance, a monkey might value one banana more highly than two because the single banana can be eaten immediately and two would require a waiting period. This is ecologically rational in an environment in which food is scarce. Thus, monkeys are naturally inclined to be impulsive and prefer immediate rewards even if the long-term alternative might, to us at least, seem more reasonable.</p>
<p>Despite the richness of resources in much of modern society, humans have not yet shaken off this same predilection for immediate gratification. And whether deliberate or not, the world we live in is increasingly set up to exploit our behavioural hard-wiring.</p>
<h2>The dark side of instant gratification</h2>
<p>A classic example is the cigarette. Its design exploits the huge power that the immediacy of reward delivery has on the way that our brains compute value. Much of its effectiveness in cultivating addiction lies in its ability to efficiently deliver nicotine, a powerful reward, just an instant after its use. In today’s world, these kinds of super-rapid and accessible reward-delivery systems are commonplace – <a href="https://theconversation.com/the-talking-dead-how-personality-drives-smartphone-addiction-62411">smartphones are a more recent example</a>. With the increasing ubiquity of these systems comes more immediacy and so more opportunity to make impulsive choices. These are the <a href="http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2033431/">potentially damaging choices</a> over which we have diminished self-control and are, from a purely economic perspective, irrational.</p>
<p>In retail, impulsive choices are encouraged because they lead to the most coveted of consumer purchases, impulse buys. Depending on the <a href="http://www.sciencedirect.com/science/article/pii/S096969891300115X">product</a>, they make up to anywhere from 40% to 80% of purchases. The essence of an impulse buy is that it satisfies immediate desires and, so, unsurprisingly, the ability to immediately gratify is a powerful tool that “brick and mortar” retailers use to lure shoppers into making impulse buys.</p>
<p>Yet with current delivery methods, Amazon cannot provide anything close to this immediacy. Enter the drone. In the same way that the cigarette revolutionised the way people consume nicotine, the drone will have a similar impact on how people consume, well, pretty much anything that can be bought. Or at least anything that can be carried by a small drone. That is, until Amazon release their <a href="http://www.freepatentsonline.com/20160378108.pdf">“mega drone” convoys into the skies capable of carrying objects as heavy as a sofa</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/170000/original/file-20170518-12231-6gnh8n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/170000/original/file-20170518-12231-6gnh8n.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=368&fit=crop&dpr=1 600w, https://images.theconversation.com/files/170000/original/file-20170518-12231-6gnh8n.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=368&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/170000/original/file-20170518-12231-6gnh8n.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=368&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/170000/original/file-20170518-12231-6gnh8n.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=462&fit=crop&dpr=1 754w, https://images.theconversation.com/files/170000/original/file-20170518-12231-6gnh8n.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=462&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/170000/original/file-20170518-12231-6gnh8n.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=462&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Amazon’s patented mega-drone, a group of interconnected drones, could transport objects as heavy as a sofa.</span>
<span class="attribution"><span class="source">Amazon.com</span></span>
</figcaption>
</figure>
<p>A product delivered by drone is thus one that has been stripped of the computational costs that usually hold us back from being completely impulsive. Minimal effort, minimal time. Click and you shall receive. When rewards are delivered in this way, it is extremely difficult for our brains to refuse them.</p>
<p>Couple this with an endless stream of tempting images delivered to our screens of the products deemed to be the ones we most desire at that given moment, as determined by the marketing algorithms monitoring our online behaviour, and we have a perfect recipe for diminished self-control and subsequent impulse buys. This is a system with which a passing temptation, provoked by an ad, no longer has to pass. Instead, with the click of a mouse, it can be almost instantly satiated.</p>
<p>The only cost to consider, of course, is the price. And the quicker Amazon can deliver their products, the higher you perceive their value, and so, the more they can charge. The price we are willing to pay is directly related to the reduction of these other costs – time and effort in particular – that our brain instinctively computes before making a choice. Retailers are well aware of this tendency, considering the millions of UK customers who are willing to pay Amazon £7.99 per month for their <a href="http://www.telegraph.co.uk/technology/2016/01/26/amazon-prime-membership-surges-by-35pc/">Prime status</a>. This extra cost does not enhance a product in any way, it merely gets it to its recipient quicker than it normally would.</p>
<h2>Fewer constraints, more impulse buys</h2>
<p>So perhaps it is the lure of this double boost – more impulse buys and higher prices – that explains the eagerness with which online retailers are to press ahead with drone delivery despite the regulatory obstacles that currently stand in their way. But why might the UK government be willing to clear the path for Amazon? Given that the country currently has <a href="http://www.telegraph.co.uk/technology/10172298/One-surveillance-camera-for-every-11-people-in-Britain-says-CCTV-survey.html">one surveillance camera for every 11 people</a> and has recently legalised <a href="http://www.theguardian.com/world/2016/nov/19/extreme-surveillance-becomes-uk-law-with-barely-a-whimper">“the most extreme surveillance in the history of western democracy”</a>, the prospect of filling the skies with thousands of flying robots equipped with cameras might sound attractive. Drones might also encourage UK citizens to become even greater consumers and thus boost an <a href="https://www.theguardian.com/business/2017/feb/22/Brexit-economy-consumers-uk-eu">economy that relies heavily on consumer spending</a>. That the profits would go to a giant multinational notorious for <a href="http://www.theguardian.com/technology/2015/jun/24/amazons-uk-business-paid-119m-tax-last-year">tax avoidance</a> is another issue, as is the fact that delivery drones would pose a threat to those who are already vulnerable to <a href="http://www.econ.nyu.edu/user/debraj/Papers/BernheimRayYeltekin2.pdf">impulsive shopping, overspending and poverty</a>.</p>
<p>But the drone is not the villain here. It’s merely a highly advanced instrument whose design and function is wholly determined by the intentions of its human minders. For instance, some companies are developing drones that could deliver <a href="https://www.theguardian.com/technology/2016/jun/24/first-successful-ship-to-shore-drone-delivery-new-jersey">medical supplies to remote locations or to people with mobility issues</a>. In a parallel universe, where the UK government values public institutions like the <a href="http://www.newstatesman.com/politics/2013/01/nhs-even-more-cherished-monarchy-and-army">NHS as much as its people do</a>, perhaps regulations are being loosened so that investments could be made in systems that contribute to social progress and not just economic growth.</p><img src="https://counter.theconversation.com/content/77994/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David O'Connor ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>Amazon.com and others are eager to fill the skies with drones delivering packages at all hours. Convenient, yes, but it could transform – and not in a good way – our ability to make informed choices.David O'Connor, Postdoctoral Fellow in Neuroeconomics, Centre national de la recherche scientifique (CNRS)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/335262014-10-28T19:07:27Z2014-10-28T19:07:27ZFor this year’s Melbourne Cup, consider a charity rather than taking on Tom Waterhouse<p>In the lead-up to next week’s Melbourne Cup, bookmaker Tom Waterhouse is heavily marketing a <a href="http://promos.tomwaterhouse.com/25-million/?utm_source=google&utm_medium=ppc&utm_campaign=Horse%20Racing_Melb_Cup_Top%20Level&sctp=ppc&scvn=google&scsrc=google_search&sckw=+tom%20+waterhouse">“$25 million bet that stops a nation”.</a> All you have to do is give him A$10 and if you place the first 10 horses in correct finishing order in the Cup you have a chance, stress “have a chance”, to win A$25 million. If other punters happen to place the same bet, then you’ll have to share the $25 million with them.</p>
<p>Tom’s number crunchers will have done their sums, of course, so he’ll know that the probability of any person correctly placing the first 10 horses is extremely low. In fact, it’s likely to be much lower than we might expect. As Princeton University psychologist <a href="http://psiexp.ss.uci.edu/research/teaching/Tversky_Kahneman_1974.pdf">Daniel Kahneman</a> found, in <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2002/">Nobel Prize-winning work</a> with Amos Tversky, humans overestimate the probability of rare events occurring. Bookies love that flaw in our mental processing ability.</p>
<p>The odds of winning <a href="https://tatts.com/tattersalls/games/oz-lotto/game-rules-and-odds">OZ Lotto</a> are disclosed as one in 45 million, while the odds of winning Powerball are disclosed as one in 76 million. A bit of standard probability analysis shows that your odds of winning with Tom may be estimated to be significantly lower.</p>
<p>Assuming no scratchings, 24 horses could start the race. Note also that the fine print of Tom’s offer provides that bets will be null and void if there are fewer than 20 runners. But let’s assume you have a considerable head start as a punter – a head start that you almost certainly won’t have in reality. You know that only 20 horses are going to start the race and you know that fact before placing your bet.</p>
<p>This helpful assumption – helpful at least from Tom’s side of the bet - is of course extremely unrealistic and unlikely. The final field will not be declared until the weekend before the running of the Cup and there are likely to be more than 20 runners.</p>
<p>To make the calculation tractable we need to make the standard assumption first applied to horse racing by the statistician <a href="http://amstat.tandfonline.com/doi/abs/10.1080/01621459.1973.10482425#.VEnGV2MavIs">David Harville</a> – namely that of conditional independence. If we also assume for simplicity that the horses have equal chances in the race, then the probability of correctly selecting the winner is one in 20, the probability of then selecting the second-placed horse is one in 19 (given the same horse can’t finish first and second) and so on down to the probability of correctly selecting the tenth-placed horse being one in 11.</p>
<p>So a bit of mathematics (20 x 19 x 18 x 17 x 16 x 15 x 14 x 13 x 12 x 11) provides that the probability of correctly selecting the first 10 horses in correct order is one in 670,442,572,800. Let’s round that down to 670 billion. So a “fair” bet would see the punter receive 670 billion times $10 or $6.7 trillion if he or she won.</p>
<p>Of course, Tom’s number crunchers will say that the horses don’t have equal chances of winning. This does change the probabilities a bit.</p>
<p>Suppose we take the most likely finishing order of the top 10 horses, which is that the favourite finishes first, the second favourite finishes second, and so on. Using the odds for the top ten favourites in last year’s Cup, or the current fixed-price odds for this year’s Cup, and assuming that only 20 horses start, estimates of the odds of correctly placing the first ten horses are still of the order of one in hundreds of millions. That suggests a fair “bet” would see the punter receive billions not millions if he or she won.</p>
<p>Enjoy Melbourne Cup day. But perhaps consider making a donation to <a href="http://www.beyondblue.org.au/">beyondblue</a> rather than to Tom.</p><img src="https://counter.theconversation.com/content/33526/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In the lead-up to next week’s Melbourne Cup, bookmaker Tom Waterhouse is heavily marketing a “$25 million bet that stops a nation”. All you have to do is give him A$10 and if you place the first 10 horses…Steve Easton, Foundation Professor of Finance, University of NewcastleAdrian Melia, Lecturer in Accounting and Finance, University of NewcastleRichard Gerlach, Professor, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/280982014-06-17T03:42:27Z2014-06-17T03:42:27ZAUDIO Q&A: Neuroeconomics and the answer to the ‘curse of choice’<figure><img src="https://images.theconversation.com/files/51282/original/t7snmfj5-1402975083.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People are notoriously bad at filtering choices - being faced with too many leads us to choose poorly.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>We are faced with a myriad of choice in our lives - but an emerging body of work suggests the more choice we’re faced with, the more likely we’ll make a poor decision. </p>
<p>The conundrum is called the “curse of choice” and the <a href="https://theconversation.com/explainer-neuroeconomics-where-science-and-economics-meet-27929">field of neuroeconomics</a> - a blend of economics, psychology and neuroscience - uses a <a href="http://www.decisionsrus.com/">variety of methodological tools</a> to understand how we make decisions and help us improve our ability to choose well. </p>
<p>New York University Professor Paul Glimcher, a world leader in neuroeconomics, visited the University of Sydney recently to present his findings on the curse of choice - and how to overcome it. </p>
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<p>Further reading: <a href="https://theconversation.com/explainer-neuroeconomics-where-science-and-economics-meet-27929">Explainer: neuroeconomics, where science and economics meet</a></p><img src="https://counter.theconversation.com/content/28098/count.gif" alt="The Conversation" width="1" height="1" />
We are faced with a myriad of choice in our lives - but an emerging body of work suggests the more choice we’re faced with, the more likely we’ll make a poor decision. The conundrum is called the “curse…Helen Westerman, Business + Economy EditorEmil Jeyaratnam, Data + Interactives Editor, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/279292014-06-17T03:42:26Z2014-06-17T03:42:26ZExplainer: neuroeconomics, where science and economics meet<figure><img src="https://images.theconversation.com/files/51173/original/mscwwp6v-1402896041.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Neuroeconomics is a burgeoning field aimed at helping us understand decision-making. </span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Whether choosing a dinner, a car, a spouse or an investment, experts now know what part of the brain our likes and dislikes are encoded, how we represent alternatives, and even how we choose. </p>
<p>This has been possible because of the increased collaboration of researchers from three disciplines: economics, neuroscience and psychology. This interdisciplinary collaboration has become so successful that it led to a creation of a new scientific field called <a href="http://neuroeconomics.org/">neuroeconomics</a>, with several centres around the world.</p>
<p>Decision-making is perhaps the most crucial and defining part of our lives. We spend every awake minute of our lives deciding. Some decisions may seem basic but are necessary for survival, such as what to eat or drink. Other decisions are more sophisticated - our finances, retirement, education, and voting. It is no wonder that understanding how exactly people make these decisions absorbed scientists in different fields for decades now.</p>
<p>Economists have been interested in decision-making to the extent that it would allow them to improve well-being. The idea is that once we can predict people’s behaviour, we ought to be able to design economies with a set of rules that makes everybody better off.</p>
<h2>The brain as a black box</h2>
<p>For years, while building their mathematical predictive models of choice, economists treated the brain as a “<a href="http://www.nsf.gov/discoveries/disc_summ.jsp?cntn_id=128239">black box</a>”. The economic models of choice were thus mathematically very elegant; but have been shown to systematically fail under numerous circumstances. </p>
<p>In the last two decades the approach to modelling choice in economics has begun to change quite dramatically. We now understand the basic architecture of the brain and how it actually makes choices. This allows us to begin to open the black box and build realistic models of choice. Many people believe that as a result of that new ability, this will be the beginning of a new era in economics.</p>
<hr>
<p><em>Opening the “Black Box” of the brain has been considered off-limits by many classical economists - so how do traditionalists view neuroeconomics? <a href="http://www.cns.nyu.edu/corefaculty/Glimcher.php">Professor Paul Glimcher</a> from New York University explains.</em></p>
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<p>Perhaps some of the most important things that we learned from neuroeconomics are in the area of aging. Scientists in many disciplines documented that decision-making over the life span changes in a systematic way. From carefully designed experimental studies, we learned that children and adolescents seem to be more impatient than adults. They are also more tolerant of unknown, which makes them appear as risk-takers. </p>
<p>Towards the end of their lives though, people appear to lose their decision-making abilities. Studies have shown that even highly functioning older adults have trouble choosing the retirement and health plans that would meet their needs. They make errors when voting and can lose substantial amounts of money by making very simple mistakes. </p>
<p>Fortunately, the multidisciplinary approach combining techniques from economics, neuroscience, and psychology, allowed us to understand the biological roots of the differences in economic behaviours over a person’s life span. We have learned from neuroscience how the brain ages and what implications this has for the changes in decision-making over the lifespan. This new insights now present new methods of dealing with age-related choice inefficiencies.</p>
<h2>‘Curse of choice’</h2>
<p>For instance, we have known for a decade or so that people have trouble making efficient choices when they face more than just a few options, which has been often called the “curse of choice”. Trying to choose the best option from a set of 12 different superannuation funds, cars, or even breakfast cereals is notoriously difficult. Policymakers have long tried to design the choice situations in such a way as to elevate these difficulties, for example by pre-selecting defaults.</p>
<p>Neuroeconomists now understand exactly what feature of the brain causes errors in these situations. Knowing how that feature works mechanically, we can prescribe different ways of choosing that play to the strengths, rather than the weaknesses, of our brains.</p>
<p>Overall, what these discoveries mean is we no longer have to blindly rely on trial and error approaches to policy design. We can instead start designing policy based on economic models of choice rooted in the biology of our brains. We can only hope that policymakers will be equally enthusiastic about this unique and new opportunity.</p>
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<p><em>Professor Paul Glimcher, currently visiting Australia from New York University, is one of the world’s leading neuroeconomists. <a href="https://theconversation.com/audio-qanda-neuroeconomics-and-the-answer-to-the-curse-of-choice-28098">Listen to Prof Glimcher</a> explain more about the curse of choice.</em></p><img src="https://counter.theconversation.com/content/27929/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Agnieszka Tymula does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Whether choosing a dinner, a car, a spouse or an investment, experts now know what part of the brain our likes and dislikes are encoded, how we represent alternatives, and even how we choose. This has…Agnieszka Tymula, Neuro-economist, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/233252014-02-17T20:06:46Z2014-02-17T20:06:46ZFear of risk linked to high stress hormone in bankers<figure><img src="https://images.theconversation.com/files/41712/original/8pd76zmg-1392652516.jpg?ixlib=rb-1.1.0&rect=12%2C22%2C1008%2C702&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fight or flight? Bankers likely to opt for the second</span> <span class="attribution"><span class="source">BK and EP</span></span></figcaption></figure><p>In times of financial uncertainty and crisis, high stress reactions lead to traders becoming more risk averse, which drives pessimism and further falls in finance, according to a new study. This is because of high levels of the “stress hormone”, cortisol, in bankers. </p>
<p>We all take risks, but in the financial sector the stakes are even higher – decisions and actions can influence market stability, economic growth and the fortune and woes of nations. And <a href="http://www.pnas.org/content/early/2014/02/13/1317908111.full.pdf+html">the new study</a>, published in PNAS, helps us understand the physiological nuts and bolts of risk taking among traders. </p>
<p>When we’re stressed higher levels of cortisol are secreted into the blood stream. The body responds with a number of <a href="https://theconversation.com/explainer-how-do-you-die-from-overwork-18023">stress-related changes</a> including increased heart rate and arousal, heightened memory and lower pain sensitivity. But it can also impair cognitive function, increase blood pressure and affect how we approach risk. </p>
<h2>Emotional finance</h2>
<p>The researchers observed how a placebo or high levels of cortisol similar to that experienced by traders affected how risk prone or averse a group of 36 volunteers became over an eight-day period (a <a href="http://www.pnas.org/content/105/16/6167">previous study</a> in 2008 suggested that market volatility over an eight-day period could increase average daily cortisol levels in traders by 68%). They were then given computerised tasks that involved choosing to playing a lottery that offered the certainty of a monetary return – a high chance of winning £30 or a lower chance of winning £90 – or a lottery with a higher chance of winning £90 but also some chance of receiving £0. The researchers found that higher and longer exposure to the hormone led more participants to opt for the less risky first choice.</p>
<p>This is important because it suggests that in continually stressful situations – such as a financial crisis – traders will tend to take less risky positions. When many traders do this all it once, it means they will dump the high or moderate risk assets (such as equities or complex derivatives) they coveted during the good times, and seek out lower risk “vanilla” assets (such as government bonds). This kind of herding instinct will further depress the price of more risky assets, accelerating the bursting of the bubble. All because of a hormone in our body. </p>
<p>The results of this study might lead some banks and policy makers to jump to the conclusion that if they can control traders’ hormones, then they could deal with boom and bust cycles. This would be to over-reach the conclusions of the study. Cortisol isn’t the whole story; there are many other studies of trader’s risk preferences which show that they are affected by <a href="http://emotionalfinance.net/2013/03/06/lions-and-lion-shaped-bushes-in-financial-markets-traders-expertise-in-emotion-regulation/">things like emotion</a>, <a href="http://www.pnas.org/content/106/13/5035.short">cognitive perspective</a>, <a href="http://www.sciencedirect.com/science/article/pii/S0191886904003575">personality</a> and the <a href="http://www.jneurosci.org/content/31/10/3712">amount of sleep</a> traders have. </p>
<p>Over three decades, research in behavioural economics has also alerted us to how our risk preferences tend to be quite different depending on <a href="http://www.sciencedirect.com/science/article/pii/S0749597898927819">how an issue is framed</a>. For instance, if a situation is described as “gambling” or “insurance” it results in very different behaviour to those working in that situation. Similarly, if losses are emphasised (rather than gains), then people also tend to behave in different ways. </p>
<p>One particularly interesting recent study looked at the impact of the way ethics policies were framed impacted on risk taking. It found that if you played up the positive benefits of ethics, then people were more likely to take greater risks and engage in more unethical behaviour. In contrast, if you focused on the need to comply with ethical rules, then you were likely to get far less risk taking and <a href="http://www.iranakhlagh.nipc.ir/uploads/science_p_10112_6044.pdf">less unethical behaviour</a>.</p>
<h2>Body, mind and soul</h2>
<p>Attempts to get at the physiological and neurological basis of markets have become wildly popular in recent years. A number of researchers have tracked traders’ physiological markers and brain activity in different settings. These ideas are now being put into practice. One London-based asset manager has started to use some of the tools from this “<a href="http://www.ft.com/cms/s/2/3ccb11a0-923b-11e0-9e00-00144feab49a.html#axzz2taAkG0jy">self-quantifier movement</a>” to begin tracking the detailed behaviour and bodily signs of their traders. They hope that by logging in what they ate for breakfast, the firm can look out for potential correlations between bodily states and trading outcomes. </p>
<p>Working this out does not just create greater stability in the financial sector. It might appeal to many traders who are often performance junkies, looking for any edge possible. Some already use life-tracking technologies in their daily life to do things like help improve their sleep. </p>
<p>But it’s also clear that such moves could give rise to the deepening of surveillance and control in financial organisations. Instead of just having results and trading behaviour scrutinised, physiological and neurological movements would also be an object of monitoring and control. This could easily give a new dimension to idea of big brother in the workplace. Even more concerning is if these new techniques of employee bio-surveillance were extended out of the trading floor and into other apparently risky occupations, such as nuclear power plant operators, airline pilots, surgeons, oil rig operatives and so on. </p>
<p>This might seem like a reasonable risk management technology, but many employees would interpret it as showing a lack of trust in their abilities and reduced autonomy. We know from many studies that increased surveillance and reduced privacy lead to bad organisational outcomes such as less experimentation, more distraction, less continuous improvement, and <a href="http://asq.sagepub.com/content/57/2/181">ultimately less productivity</a>. </p>
<p>As the researchers of the new study point out, many influential models in economics, finance and neuroscience have assumed approach to risk is a stable trait, especially in sectors where people work in and are trained in the business of risk. But we are physiological beings after all, and since the financial crisis in 2007 it has been increasingly realised that risk is much more dynamic. And more focus is rightly being turned on how exactly our individual physical reactions can affect what we do and the world trading floor. </p><img src="https://counter.theconversation.com/content/23325/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andre Spicer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In times of financial uncertainty and crisis, high stress reactions lead to traders becoming more risk averse, which drives pessimism and further falls in finance, according to a new study. This is because…Andre Spicer, Professor of Organisational Behaviour, Cass Business School, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/194182013-10-22T19:42:54Z2013-10-22T19:42:54ZDelayed gratification – how the hippocampus helps us hold off<figure><img src="https://images.theconversation.com/files/33464/original/khypd7js-1382422808.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A game of bowls now, or Premier League tickets in a month? Your hippocampus can help.</span> <span class="attribution"><span class="source">Crystian Cruz</span></span></figcaption></figure><p>Would you prefer a beer right now or a bottle of champagne next week? So begins an interesting new study published today in the journal <a href="http://www.plosbiology.org/article/info%3Adoi%2F10.1371%2Fjournal.pbio.1001684;jsessionid=9A06D925C16207AB4B5E7C69BDEC05FA">PloS Biology</a>.</p>
<p>Of course these kinds of choices feature throughout our lives, sometimes with profound ramifications. A fling or lasting long-term relationship? Just one more harmless bet, or your savings for a deposit?</p>
<p>How we consider small, short-term gains versus large long-term windfalls has long been of interest to psychologists and economists. In fact, these mental trade-offs are described in the neuroeconomic literature by the term “<a href="http://onlinelibrary.wiley.com/doi/10.1111/1467-9892.00104/abstract">hyperbolic decay function</a>”. </p>
<p>It turns out that when rewards are in simple monetary form our choices trace a <a href="http://en.wikipedia.org/wiki/Sigmoid_function">sigmoid curve</a> (stretched out s-shape). That is, we have high chances of choosing the distant reward if it is large enough, but almost zero chances when we’re talking about small change. </p>
<p>Under these circumstances humans are predictably consistent – how we differ is whether our personalised curve is shifted left (biased towards long-term gains) or right (biased towards short-term gains). </p>
<p>In this field (and this paper) researchers use somewhat pejorative terms for these two styles of thinking: non-impulsive or impulsive. </p>
<h2>Sooner or later?</h2>
<p>Subjects were asked whether they’d prefer an immediate (“now”) or delayed reward (“in a month or year or in ten years”) using real world examples from sport, culture and food. </p>
<p>A bowling session today was set against Premier League football tickets next year; a packet of chips pronto versus lobster in the <a href="http://www.tourmontparnasse56.com/">Tour Montparnasse</a> restaurant in ten years time (the researchers were French, after all). </p>
<p>Subjects did two versions of this forced-choice task. One was with the delayed scenario provided as text, so participants had to use comprehension and imagination to figure out if they wanted it. In the other, a simple monetary reward was used as the delayed choice option.</p>
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<a href="https://images.theconversation.com/files/33445/original/xh5z36t9-1382415732.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/33445/original/xh5z36t9-1382415732.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/33445/original/xh5z36t9-1382415732.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=899&fit=crop&dpr=1 600w, https://images.theconversation.com/files/33445/original/xh5z36t9-1382415732.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=899&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/33445/original/xh5z36t9-1382415732.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=899&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/33445/original/xh5z36t9-1382415732.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1130&fit=crop&dpr=1 754w, https://images.theconversation.com/files/33445/original/xh5z36t9-1382415732.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1130&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/33445/original/xh5z36t9-1382415732.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1130&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Sophie Marceau: your dinner date?</span>
<span class="attribution"><span class="source">Ivan Bessedin</span></span>
</figcaption>
</figure>
<p>The first result was to show that imagined long term choices behave just like concrete monetary choices, however, not based on their dollar value but on how much the participants ‘like’ them.</p>
<p>The team also showed that likeability of imagined outcomes was loosely related to the number of imagined details (dinner at Montparnasse, with <a href="http://www.imdb.com/name/nm0000521/">Sophie Marceau</a>, in a lowcut dress). Clearly, these are not independent; we generally like more expensive rewards and these tend to excite our imagination. </p>
<p>The next observation was, however, quite novel. Those subjects who tend to imagine the delayed reward more richly (with more reportable details) also tend to produce less impulsive choices. </p>
<h2>The brain’s involvement</h2>
<p>When young adults performed the same task inside a <a href="https://theconversation.com/the-science-of-medical-imaging-magnetic-resonance-imaging-mri-15030">MRI scanner</a>, the <a href="http://en.wikipedia.org/wiki/Dorsolateral_prefrontal_cortex">dorsolateral prefrontal cortex</a> was strongly activated in those who prefer the far-off-but-more-valuable reward over the immediate-less-valuable reward, regardless of whether they were imaging the scenario or were simply flashed a cash sum on a screen. </p>
<p>This is completely in accord with current neuroscience understanding of this brain structure, critical to inhibiting automatic behaviours and “keeping us in control”.</p>
<p>The next finding was compelling. When a long-term reward was <em>imagined</em>, the <a href="http://en.wikipedia.org/wiki/Hippocampus">hippocampus</a>, that part of the brain well known to play a vital role in memory, - and mainly <em>left</em> hippocampus - was specifically activated during non-impulsive choices. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/33447/original/8zwpn64q-1382416084.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/33447/original/8zwpn64q-1382416084.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/33447/original/8zwpn64q-1382416084.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=388&fit=crop&dpr=1 600w, https://images.theconversation.com/files/33447/original/8zwpn64q-1382416084.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=388&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/33447/original/8zwpn64q-1382416084.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=388&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/33447/original/8zwpn64q-1382416084.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=488&fit=crop&dpr=1 754w, https://images.theconversation.com/files/33447/original/8zwpn64q-1382416084.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=488&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/33447/original/8zwpn64q-1382416084.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=488&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><span class="source">Wikimedia Commons</span></span>
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<p>And when researchers looked at each individual’s hippocampus activity, they could predict (loosely) whether that person had made a non-impulsive choice.</p>
<p>These functional differences in non-impulsive choices also translated to structural differences in the hippocampus. Surprisingly, given the relatively crude method used, the team found that those individuals who gravitate to long-term imagined rewards also had more dense grey matter in the hippocampus (though not necessarily a larger hippocampus). </p>
<h2>Future memories</h2>
<p>This work therefore links to other research that recasts the role of the hippocampus as not just for memory of past events, but for memory of the future. </p>
<p>“<a href="http://en.wikipedia.org/wiki/Prospective_memory">Prospective memory</a>” is our ability to remember to do something tomorrow, next week or next month. Recent research has shown that the hippocampus is critically important for such mental time travel, a key part of brain circuits that help us not only store and look up information, but also skip forward in time and imagine and populate the future.</p>
<p>This research may also help explain a particularly strong but <a href="http://www.ncbi.nlm.nih.gov/pubmed/22902920">curious result</a> from our own lab. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/33448/original/jq4wndgj-1382416174.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/33448/original/jq4wndgj-1382416174.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/33448/original/jq4wndgj-1382416174.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=896&fit=crop&dpr=1 600w, https://images.theconversation.com/files/33448/original/jq4wndgj-1382416174.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=896&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/33448/original/jq4wndgj-1382416174.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=896&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/33448/original/jq4wndgj-1382416174.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1126&fit=crop&dpr=1 754w, https://images.theconversation.com/files/33448/original/jq4wndgj-1382416174.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1126&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/33448/original/jq4wndgj-1382416174.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1126&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Neil. Moralee</span></span>
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<p>We found that older people who had been in charge of more than ten people in their working lives not only had a larger, healthier hippocampus, but their rate of hippocampal shrinkage was almost five times slower than those who had never supervised another person. And this result was strongly left-sided, just like the results from the French team. </p>
<p>On a speculative basis, it is possible that the routine mental time travel of supervisors, weighing and imaging future long-term gains (for themselves and their staff or students) against short-term outcomes leads to major benefits to hippocampal structure.</p>
<p>But what is the direction of causality here? Does hippocampal structure and function drive non-impulsive decision-making through imagined detail, or is the other way around? Cognitive neuroscience is replete with these chicken-or-egg conundrums. </p>
<p>The final act of the paper tries to tackle this issue by studying patients with neurodegenerative disorders, but the wheels fall off somewhat. Patients with Alzheimer’s have hippocampal damage, and so following the team’s argument one would expect severe impairment in imagining delayed rewards. </p>
<p>Yet it was frontal lobe dementia patients, with known damage to the dorsolateral control system, who (unsurprisingly) performed the worst at both non-imagined and imagined non-impulsive decision making. </p>
<p>The wisdom of mapping brain-behaviour relationship revealed in healthy university age adults straight onto older individuals with multiple long-standing and overlapping brain diseases is also dubious.</p>
<p>Overall, the real value of this work is to provide a new insight into the psychology and biology of imagined reward choices. </p>
<p>The better we can imagine delayed rewards in rich detail the more likely we are to choose them over immediate gratification – and the hippocampus seems to be a key part of this process. </p><img src="https://counter.theconversation.com/content/19418/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Valenzuela receives funding from the NHMRC and other funding bodies.</span></em></p>Would you prefer a beer right now or a bottle of champagne next week? So begins an interesting new study published today in the journal PloS Biology. Of course these kinds of choices feature throughout…Michael Valenzuela, Associate Professor & Leader of Regenerative Neuroscience Group, Brain & Mind Research Institute, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/54452012-02-20T13:31:07Z2012-02-20T13:31:07ZEconomics and the brain: how people really make decisions in turbulent times<figure><img src="https://images.theconversation.com/files/7837/original/znycsmrz-1329715250.jpg?ixlib=rb-1.1.0&rect=20%2C20%2C970%2C631&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">When emotions meet economics: New York police and protesters clash during the Occupy movement protests on Wall Street.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>In a <a href="http://www-psych.stanford.edu/%7Eknutson/bad/loewenstein08.pdf">2008 paper on neuroeconomics</a>, Carnegie Mellon University economist <a href="http://sds.hss.cmu.edu/src/faculty/loewenstein.php">George Loewenstein</a> said: “Whereas psychologists tend to view humans as fallible and sometime even self-destructive, economists tend to view people as efficient maximisers of self-interest who make mistakes only when imperfectly informed about the consequences of their actions.”</p>
<p>This view of humans as completely rational - and the market as eminently efficient - is relatively recent. In 1922, in the Journal of Political Economy, <a href="http://www.wharton.upenn.edu/125anniversaryissue/tugwell.html">Rexford G. Tugwell</a>, said (to paraphrase) that a mind evolved to function best in “the exhilarations and the fatigues of the hunt, the primitive warfare and in the precarious life of nomadism”, had been strangely and quickly transported into a different milieu, without much time to modify the equipment of the old life.</p>
<p>The field of economics has since rejected this more pragmatic (and I would argue, realistic) view of human behaviour, in favour of the simpler and neater “rational choice” perspective, which viewed the power of reflection as the only force driving human behaviour. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/7831/original/2npfh35m-1329710980.jpg?ixlib=rb-1.1.0&rect=20%2C28%2C666%2C598&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/7831/original/2npfh35m-1329710980.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=553&fit=crop&dpr=1 600w, https://images.theconversation.com/files/7831/original/2npfh35m-1329710980.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=553&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/7831/original/2npfh35m-1329710980.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=553&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/7831/original/2npfh35m-1329710980.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=695&fit=crop&dpr=1 754w, https://images.theconversation.com/files/7831/original/2npfh35m-1329710980.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=695&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/7831/original/2npfh35m-1329710980.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=695&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The notion we make rational economic decisions is being challenged by research on the brain.</span>
<span class="attribution"><span class="source">Flickr</span></span>
</figcaption>
</figure>
<p>But to paraphrase sociologist <a href="http://www.sociology.leeds.ac.uk/bauman/conference/speakers/bauman.php">Zygmunt Bauman</a>, our currently held views of what is reasonable, sensible and good sense tend to take shape in response to the realities “out there” as seen through the prism of human practice – what humans currently do, know how to do, are trained, groomed and inclined to do.</p>
<p>We compare ourselves to people we know, and come into contact with – either through social groups, or lately, with the advent of mass and, even fragmented media, people we think are like us.</p>
<p>Regardless of what is happening in <a href="http://www.theaustralian.com.au/business/in-depth/spain-greece-protest-against-spending-cuts/story-fnawdwo8-1226275419648">Greece or Spain</a>, or <a href="https://theconversation.com/the-arab-world-a-new-model-for-civilised-revolution-962">Yemen</a>, we think about our situation, first and foremost. </p>
<p>And if we are being told consistently that our life is bad, and is going to get worse, then we start to believe that we live in desperate times, regardless of what we might be told through statistics and economic models. </p>
<h2>Risk as feelings: how our brain makes decisions</h2>
<p>Under pressure or stress, it is our <a href="http://www.brainexplorer.org/glossary/amygdala.shtml">amygdala</a>, the emotional centre of the brain, that takes control, even as the thinking brain, the <a href="http://code.google.com/p/ahuman/wiki/BiologicalCortexModel">neocortex</a>, is still analysing and coming to a decision.</p>
<p>George Loewenstein and his colleagues have suggested that people react to risks at two levels – by evaluating them in a dispassionate way, but also at an emotional level. </p>
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<p>He called this the <a href="http://sds.hss.cmu.edu/media/pdfs/loewenstein/RiskAsFeelings.pdf">Risk as Feelings thesis</a>. He argued we overreact emotionally to new risks (which are often low-probability events), and underreact to those risks that are familiar (although these events are more likely to occur). So, as Loewenstein explains, “this is why people seemed to initially overreact to the risk of terrorism in the years immediately following 9/11 [and the Bali bombings], but tend to underreact to the much more familiar and more likely risks of talking on the mobile phone while driving, and wearing seatbelts”. </p>
<p>More and more, psychological and neurological science is discovering that much of our decision-making is made at an unconscious and emotional level. What we are now finding is that when we are thinking about mundane and simple issues, such as small calculations, the brain areas associated with rational planning (such as the pre-frontal cortex) tend to be more active. </p>
<p>But when thinking about difficult, exciting, interesting activities, such as investing in a new business, or perhaps buying a $10 million lottery ticket, the brain areas associated with emotion – such as the midbrain dopamine system – become more active. </p>
<p>Images, colours, music, even social discussion means that the midbrain emotional area becomes dominant, and the rational part of the brain finds it hard to resist the temptation. The emotional centres of the brain simply tell the rational part to shape up or ship out.</p>
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<p>And then, a very funny thing happens. The rational part of the brain agrees, and starts to look for evidence that supports the emotional brain – it becomes an ally in the search for reasons why the emotional choice is a good one. (All of this is going on very quickly and we are not conscious of it.)</p>
<h2>The “interpreter” function </h2>
<p>And probably one of the most important discoveries arising from research is that the human brain contains an “interpreter” function that generates a conscious explanation for any unconsciously motivated action or unconsciously generated feeling, and makes us believe that the conscious explanation actually was the reason for the action or feeling. </p>
<p>So, if we are confronted with information that does not connect with our self-image, knowledge, or conceptual framework, the interpreter creates a belief to enable all incoming information to make sense and mesh with our ongoing idea of our self. As <a href="http://www.press.uchicago.edu/Misc/Chicago/1932594019.html">Michael Gazzaniga</a> says in his book, The Ethical Brain: “The interpreter seeks patterns, order, and causal relationships.”</p>
<p>So when it comes to buying something that is based purely on chance, or something that we don’t completely understand, for most of us, it’s our emotions that make the decision – there is nothing rational about it. </p>
<h2>Optimism bias and the effort of rejection</h2>
<p>And once we’ve made the decision, the optimism bias, amongst other things, kicks in to protect our ego. To some degree, the optimism bias causes many of us to overestimate our degree of control as well as our odds of success.</p>
<p>But optimism isn’t a bad thing. If we didn’t make decisions based on emotions and optimism, we would never get out of bed in the morning, and optimism makes us feel like we are in control, which is good. </p>
<p>Research in human decision-making suggests that humans are “hard-wired” to believe, predominantly because it requires significant cognitive resources to test an assumption, so it is more efficient to believe in a claim than to reject it. This is why we mostly trust big institutions, well-known brands, and figures of authority, just because we don’t have the resources to test every assumption we make.</p>
<p>One way to think about this approach is to consider how we might assess the arguments presented to us, when we make an investment decision. Distraction, for example, is a very useful way to convince a person to accept an idea before they have had time to comprehend it. According to Harvard University psychologist Daniel Gilbert <em>(See the video below, where he talks about happiness)</em>, once they have accepted the idea, they have to unaccept it.</p>
<p> </p>
<p>In other words, the acceptance of an idea is automatic, whereas the subseqent rejection of that idea requires more effort than its acceptance.</p>
<p>And this flaw in our thinking can have serious consequences. What ends up happening is that we want to believe: partly because of the way that we process information, and partly because once we have accepted an idea, it is our ego’s role to do everything it can to convince is that we have made a good decision.</p>
<p>In the world of business, wanting to believe can mean the difference between pursuing a particular business decision, having convinced ourselves that it was the right one, and looking at the information that tells us it is not. Wanting to believe also means that it becomes difficult for us to reverse our decisions, even when the evidence tells us that we should.</p>
<h2>So can we trained out of this?</h2>
<p>At face value, financial literacy training seems to be a very sensible and rational response to a tricky area. But there is also evidence to suggest that the more familiar and more comfortable we become with numbers, the more likely we are to make mistakes. </p>
<p>Indeed, there is some evidence to suggest that experts are more prone to making poor forecasts in their field of expertise simply because of their overinflated view of their superiority, and their willingness to not always use evidence when making predictions. It’s called the overconfidence effect.</p>
<p>It might even be that it would be better not to just teach financial literacy, but to focus on a range of critical thinking methods that would hopefully make it easier for us to engage with those numbers.</p>
<p>Research suggests most of us simply don’t think about numbers when we are confronted with them – we just accept them at face value. Both <a href="http://books.google.com.au/books/about/Calculated_risks.html?id=UmUPAQAAMAAJ&redir_esc=y">Gerd Gigerenzer</a> and <a href="http://www.asb.unsw.edu.au/schools/Pages/EricSowey.aspx">Eric Sowey</a> have argued that people are willing to accept a statistic that a perceived authority presents on trust, rather than argue back. </p>
<p>A more effective approach might not be to simply teach financial literacy, but to teach critical thinking - including critical thinking around numbers and authority.</p>
<p>The other issue to consider is when we teach financial literacy and critical thinking. I would argue we should be encouraging children to be critical thinkers as early as possible. </p>
<p>Encouraging children to (respectfully) ask their teachers and parents why - and the parents and teachers giving a respectful answer - is not going to lead to the downfall of society. If anything, it is going to lead to adults who may think more reflectively about their choices.</p>
<p>If our children have positive experiences in relation to learning early, they are more likely to stop and reflect on their behaviour later in life. They are also more likely to be better students of life, in general. </p>
<p><em>This article is an edited extract of Paul’s presentation, ‘How people make complex decisions in turbulent times’ to the <a href="http://asic.gov.au/asic/pdflib.nsf/LookupByFileName/ASIC-SS12-Program-16-Feb-2012.pdf/$file/ASIC-SS12-Program-16-Feb-2012.pdf">ASIC Summer School 2012: Building resilience in turbulent times</a>, February 20-21, Sydney.</em></p>
<p><em><strong>The original version of this article incorrectly identified George Loewenstein as from Stanford University. He is from Carnegie Mellon University</strong>.</em> </p><img src="https://counter.theconversation.com/content/5445/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Harrison does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In a 2008 paper on neuroeconomics, Carnegie Mellon University economist George Loewenstein said: “Whereas psychologists tend to view humans as fallible and sometime even self-destructive, economists tend…Paul Harrison, Senior lecturer, Graduate School of Business, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.