Neuroeconomics is a burgeoning field of research that is shedding new light on traditional economic models. By utilizing the findings from economics, neuroscience and psychology, experts are gaining new insights into how people make decisions, and about the neural mechanisms in the brain that trigger economic decisions.
At the University of Pennsylvania, Joseph Kable, assistant professor in the psychology and education departments, is conducting research in neuroeconomics, and considering ways to bring the pioneering approach into the working world. Professor Kable studies how people make decisions by tracing out the underlying psychological and neural mechanisms of choice. His studies address questions such as how people’s choices deviate from rational choice theory, and what people do if they’re offered US$20 now or US$21 a few weeks later. He uses functional Magnetic Resonance Imaging (fMRI) to show the value people place on immediate and delayed rewards. Neural value signals can help explain these deviations and how decision-making processes differ from individual to individual.
Professor Kable spoke with Arabic Knowledge@Wharton to explain his work in neuroeconomics and the how the research could apply to a wide range of decision-making processes, from daily buying decisions to the unrest in the Middle East.
An edited transcript of the conversation follows.
Arabic Knowledge@Wharton: What exactly is neuroeconomics?
Joseph Kable: Neuroeconomics is a convergence of two influences. On the one hand, it’s the neuroscientist who wants to understand what is going on in the brain when people and animals make decisions. They’ve come to the realization that to really understand the neural processes, you have to have a framework for understanding decisions at a behavioral level, and that’s going to come from economics, psychology, judgment and decision-making. You have economists, psychologists, and others who are coming to the realization that neural processes are another source of data that could inform their own theorizing and their own modeling about how people make decisions. This could be a new source of tools for testing theories in economics and psychology.
Arabic Knowledge@Wharton: How is the brain used to analyze decision-making?
Kable: One thing is that the neural mechanisms become another place to test extensions of your theories. One example from my own work is trying to understand how people make decisions about time, and why people aren’t patient. They want good things to happen sooner and they don’t want to wait around for them. There’s a lot of thinking trying to explain that we fundamentally think about immediate rewards and delayed rewards, using two different mechanisms.
There are other explanations about the phenomenon, which posits, that there’s no categorical boundary between now and not now. One of the things that I did with Professor Paul Glimcher [head of the Center for Neural Science at New York University] was that we tested whether the neural response [involved] when you’re making decisions on whether [wanting] something now versus [wanting] everything later was categorically different and we found that it wasn’t. We think that counts as evidence in explaining why people who are more patient are going to do better [in life].
Let me see if I can give you another example that works on the same principle: There are a lot of people who work in marketing who want to ask questions about people’s relationship to brands. The assumption is people relate to brands exactly as people relate to people. For example, Coke is a friend of yours, or that Burger King is a naughty little boy. That’s not how people think about brands. The work of a colleague of mine, Carolyn Yoon, associate professor of marketing at the University of Michigan, suggests that when you ask people to make judgments about brands or you ask people to make judgments about people, you’re getting completely different neural networks. You can force people to think in that way but that’s not a natural way people think about brands.
So if you want to study their perceptions of brands, you might want to move in the direction that doesn’t assume that people think about brands in the same way they think about people.
Arabic Knowledge@Wharton: Can you give other examples of how neuroeconomics can be applied to real-world business issues?
Kable: In the work of another colleague of mine, knowing a little bit about the brain can lead you to make new and somewhat counterintuitive decisions when you’re designing products. This is the work of Charles Spence, professor of experimental psychology and head of the Crossmodal Research Laboratory at Oxford University.
Nowadays, luxury car companies have all those advanced systems, such as how the car can tell where the driver is looking, where the car is going. The question is, if you’re getting input that the car is headed to a ditch, and you can tell the driver is not looking at the road, how are you going to tell them to look at the road? I think most people’s intuition is telling them to put a really big red light on the dashboard and flash, ‘Look at the road, look at the road!’
Charles knows about sensory neuroscience and knew about a striking finding, that if you stimulate a certain part of the brain, it elicits a very automatic defense mechanism. And the interesting thing about this part of the brain is it’s the part of the brain that processes noises that are close to you and right behind your head. On the basis of this, he figured out something that might be considered counterintuitive. The thing that works the best is you put an alarm behind the driver’s head.
So he tested this [theory] out — whether the big, red light in front of the driver or the noise right behind him would work better. He found the noise behind them would work better as an alarm system.
I think that’s another example of the interplay between neuroscience and marketing at work with productive findings. This wasn’t a neuroscience study. Professor Spence wasn’t putting people on an MRI scanner. He was just aware of the development in sensory science, and that motivated a behavioral prediction that he went out and confirmed. In a lot of cases, behavioral predictions are not necessarily important in the applied domain, but in this case, the behavioral prediction was very much [pertinent] in the applied domain. In this case, how do you design a product that’s going to work the best?
Arabic Knowledge@Wharton: Looking at some of the turmoil in the Middle East, the economic situation has been the way it is for years. So, what was the tipping point? What made people do what they did in Tunisia or Egypt at this point? Can neuroeconomics explain some of this?
Kable: I do think there are some relevant factors that we know about from studying decision-making. Why is there a tipping point? Well, one factor is that protesters are likely engaged in what economists call a ‘coordination game.’ If everyone takes to the streets, the likelihood of success is great. But if there isn’t a critical mass, the likelihood of success is much lower, and putting yourself on the line is much more dangerous than staying home. So each individual’s decision hinges critically on what they expect other people will do. Once there are enough people who expect — or see with their own eyes — that others are ‘in,’ the calculus changes, and it can change very quickly.
Arabic Knowledge@Wharton: What kind of research is your center doing?
Kable: A lot of my work is on patience and impulsivity; how people generally prefer to have good things happen sooner rather than later. And the current work I’m doing is really looking at two directions.
One understands what changes in the brain when people’s degree of impulsivity changes. We have people make a financial decision about a task in the future. So we give people financial advice, like how to calculate interest rates, how to think about interest rates, how to compare the options they’ve been given in this experiment to other options they already know about because they’ve already had access to them outside of a psychology experiment. And we can find what leads people to be more patient with regard to the future.
There’s been a lot of work about biases and how that affects decision-making. Or how nudges in decision-making can be used to push people in one direction or another. You can change how a question is framed and that can subtly lead people to be more or less patient.
Arabic Knowledge@Wharton: How seriously do people’s choices deviate from rational choice theory?
Kable: I am of the opinion that people deviate much less than you might expect, given the popular and academic characterizations of people being riddled with biases and irrationalities. But I also think that as we study them, they reveal that people’s minds are rationally maximizing something, just not what experimenters had expected or predicted. One example of this that we’re looking at is failures of "self-control." When people give up on a difficult task (from solving puzzles in the lab, to sticking to a diet outside the lab), it’s often seen as weakness. And when you’ve already sunk time and effort into it, it’s sometimes seen as irrational — why didn’t you just not try in the first place? But these analyses ignore the opportunity costs of your time and mental efforts. You could be applying your focus to more valuable activities. Instead of solving the experimenter’s puzzles, you could think about your homework assignments. Instead of worrying about what to eat, you could work on exercising more. And if the first activity isn’t paying dividends, it makes total sense to move on. In that light, these ‘failures’ stop looking so much like failure.
Arabic Knowledge@Wharton: How does decision making differ across individuals, and what are the sources — psychological, genetic, and neural — of such individual differences?
Kable: There are many examples, but one I’ve studied is individual differences in how people make decisions about the future. We can ask people whether they’d prefer to have a smaller amount of money immediately or a larger amount of money at some future point in time. They differ extraordinarily on their answers. Some people are extremely patient. They say, for example, that they’d prefer US$21 in three months to US$20 today. Others are extremely impatient. They say that they’d take the US$20 now rather than wait three months for US$120. And anecdotally, these differences are related to differences in people’s personality and behavior.
The most patient person I studied was a medical resident who came in for the experiment on their one day off each month. The most impatient person sent me cool pictures of the time they went skydiving.
We’ve shown that these differences are related to how the striatum and prefrontal cortex are active when these individuals make these decisions. The parts of those regions that encode how valuable an option is to you are very active for small, delayed rewards in patient people, and not so active, in the same case, for impatient people. Since these regions get prominent inputs from dopamine neurons, it would make sense if these activation differences were associated with genetic differences in the dopamine system, and now there’s growing evidence that this is the case. Both these brain regions and dopamines have been implicated in impulsivity generally (e.g. "acting without thinking"), but we’ve shown in our lab that the impatience we measure in decision-making tasks is fundamentally different from those other kinds of impulsivity. There’s almost no relation between the two measures.
We do see a correlation between the people willing to wait in a task and measures of academic ability or academic performance. We do also see being very impatient, in respect to the future, [can lead to] lots of bad health outcomes. Being very impatient is associated with drug use, obesity, problem gambling, alcoholism, and a whole range of bad life outcomes.
Arabic Knowledge@Wharton: You mentioned studying the mechanisms underlying changes in people’s preferences. Is that through MRI?
Kable: In the same decision-making task (US$20 today versus US$120 in a month), we’ve shown that people become more patient and more willing to wait for the delayed reward after learning some basic information about finance (e.g. how to calculate the implied interest rate in the tradeoff presented). One question you might ask is: Are they learning to ‘like’ the delayed reward more, or are they learning to choose delayed rewards even though they don’t ‘like’ them? We think the patterns of brain activity when they choose the delayed reward after learning will inform the answer to this question. We’ve shown before that the patterns of brain activity in striatum and prefrontal cortex reflect what reward is most valuable to the person, and are different for patient and impatient people.
Arabic Knowledge@Wharton: Is that the same MRI machine used to check for concussions?
Kable: It’s the same technology. But what is a recent development is the technique — the way of running the MRI that allows you to measure neural activity with good facial and temporal positions. Before that, there were other techniques used for measuring human brain function. We had other functional imaging techniques, but certainly, I think part of the reason why neuroeconomics took off so much was [the fact that] MRI technology became widely available. Before that, the tests were more expensive so fewer people had access to them.
Arabic Knowledge@Wharton: Would the principles of immediate gratification versus delayed gratification get affected in emerging market societies?
Kable: Certainly one thing that is critically important to the question of immediate versus delayed gratification is uncertainty. Emerging markets, terrorism, poverty, etc. would all contribute to uncertainty. Let me give you an example of an emerging market facing extreme poverty: South Africa. A colleague of mine ran the same experiments in poor areas of South Africa that I’d run in the U.S. with college students, asking them whether they would prefer a smaller amount of money now or a larger amount of money later. He found a much greater degree of impatience in South Africa, compared to the U.S. — so much so that we cannot use the same questions in the two countries (i.e., most South Africans would take all of the money now, given the same questions we used in the U.S.). And much of this makes sense given the uncertainty there. If you’re not sure what your conditions will be in the future, or whether you’ll even still be around, why wait?
One point this makes clearly is that in making decisions about delayed gratification, your expectations about the future are key. We’re currently using fMRI to look at how these expectations are represented in the brain, and how experience or new learning updates them. You can imagine how, if everyone suddenly perceives lots more uncertainty all at once, the shift towards immediate concerns could wreak havoc on an economy. We’re interested in understanding the neural processes that underlie such shift in perceptions.
Arabic Knowledge@Wharton: How did the field of neuroeconomics first develop?
Kable: You had a couple of neuroscientists reaching out to economists. And you had a couple of people in behavioral economics, and psychology in economics, who were excited by the rise of cognitive neurosciences and all these methods for understanding how human brain works. They were starting to reach out to neuroscientists. In the early days, there were special conferences that were quite small, which brought together a small group of people from both sides. After those meetings went on for three to five years, more people became interested in the subject and more people got involved. Instead of people from two different fields talking to each other, it really started to develop into a field of its own. And now there’s a Society of Neuroeconomics and annual conferences in neuroeconomics.
There’s been a parallel development both in the U.S. and in Europe. The early conferences were in the U.S. but nowadays one of the most successful labs is in Zurich. There’s also a growing community in Asia, primarily in Korea, Singapore, Taiwan and China.
Arabic Knowledge@Wharton: How long has neuroeconomics been a field of research?
Kable: There’s been some debate about when exactly it started. I think clearly it was about the turn of the century, or maybe a little after that when the discussion really get started. I would say that in the last five years things have taken off exponentially. Part of [the reason for] that is the functional MRI, which is the workhorse technique for looking at human brain function. It only came in wide use in the mid-90s. By the year 2000, most institutions would have ready access to that technology. So that is one precursor that has helped make neuroeconomics [so thriving today].
One thing that I would add is that this is a very exciting field, and also a very new field. We don’t want to get too excited that neuroeconomics holds all the answers. Lots of smart people have been working on economics and judgment, as well as decision-making in business for a long time. This one tool won’t unlock all the doors. The flip side is not dialing down expectations, not that it’s useless. It’s very useful. Even though we’re early on in the game, its utility will only grow as we gain a more sophisticated understanding of neural mechanism in decision-making.