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Fairness and The Brain (and Other Neuroeconomic Studies)

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The California Institute of Technology is undertaking a study in neuroeconomics, and it has to be one of the most interesting things I’ve come across in the realm of finance in the past few years.

brainThe researchers are undertaking experiments in which they measure reactions in the brains of individuals [WSJ] who must decide to distribute food to starving children equally, or allow some children to receive more food for the benefit of the entire community.

Of course, no children are actually affected by these experiments, but the subjects don’t know that.

To trigger the brain behavior, the 26 volunteers had to believe their decisions really would affect orphans being denied their seat at a groaning board of plenty where others feasted. So, the experimenters made them all study a 10-page brochure with pictures of 60 orphans. In 36 rounds of testing, each subject had 10 seconds to choose the lesser of two evils: Allow some children to keep more than their fair share of meals or take away their food to eliminate inequity.

I never really looked into the field of neuroeconomics before, but I’ve been finding it fascinating.

In the New York Times last year, an article focused on research to determine why investors do what they do. These researchers discovered that people are more likely to take a foolish financial risk when their brains are in a “positive arousal state.”

But when people think about costs, they use different brain modules and become more anxious. They play it too safe, at least in the laboratory. Furthermore, people are especially afraid of ambiguous risks with unknown odds. This may help explain why so many investors are reluctant to seek out foreign stock markets, even when they could diversify their portfolios at low cost.

Marketers must already understand this to an extent. People are more likely to buy a product when they are thinking about the potential benefits of the purchase and when their minds are immersend in positive thought. The costs, like fees, are in the fine print or otherwise hidden for view, and the hooks are set in large type and are shouted from the front of the seminar floor.

If you like research, here are several of the studies taking place at The Center for the Study of Neuroeconomics at George Mason University:

Call Auction Experiments. In a call auction participants indicate their willingness to buy or sell units of a good by placing an order to buy or sell some number of units at their buying or selling price…

How People Trade. We take the view that the ability to trade is an evolutionary adaptation to social environments. Using language, theory of mind, and reciprocity, people succeed in forming trading partners with little institutional support.

At the Stanford Neuroeconomics Lab:

* Neural basis of financial decision making
* Reward dynamics
* Neural basis of experienced reward
* Neuroeconomics of giving

For another interesting take on neuroeconomics, read Mind Games, an article from The New Yorker.

Image credit: Gaetan Lee

Updated June 20, 2014 and originally published October 12, 2007. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 3 comments… read them below or add one }

avatar Preet

How interesting – I’m a stockbroker but my background was in Neuroscience in university. I actually have a meeting next week to see if I can work with my alma mater’s faculty to do some research on behavioural finance – no EEG’s or anything like that at this point – but I wanted to write a paper than studies the spending/savings habits of people starting from the early 1900′s up to today and try and figure out what went wrong. There was a time when people bought houses outright with no mortgage, and when the first mortgages appeared, mortgagors were shunned! :) Now if you’re up to your eyeballs in debt you’re normal – even for debt for depreciating assets.

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avatar KMC

I’m almost done reading a new book by Jason Zweig about neuroeconomics called Your Money and Your Brain.

It’s a really interesting read and I’ll be reviewing it on my site new week. Flexo, you’d most certainly enjoy it.

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avatar thomas

interesting twist from the normal post!

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