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The New Yorker on Neuroeconomics
A recent issue of The New Yorker has some lengthy coverage of the rise of neuroeconomics by business writer John Cassidy. A few interesting excerpts:
Trust plays a key role in many economic transactions, from buying a secondhand car to choosing a college. In the simplest version of the trust game, one player gives some money to another player, who invests it on his behalf and then decides how much to return to him and how much to keep. The more the first player invests, the more he stands to gain, but the more he has to trust the second player. If the players trust each other, both will do well. If they don’t, neither will end up with much money.
Fehr and his collaborators divided a group of student volunteers into two groups. The members of one group were each given six puffs of the nasal spray Syntocinon, which contains oxytocin, a hormone that the brain produces during breast-feeding, sexual intercourse, and other intimate types of social bonding. The members of the other group were given a placebo spray.
Scientists believe that oxytocin is connected to stress reduction, enhanced sociability, and, possibly, falling in love. The researchers hypothesized that oxytocin would make people more trusting, and their results appear to support this claim. Of the twenty-nine students who were given oxytocin, thirteen invested the maximum money allowed, compared with just six out of twenty-nine in the control group. “That’s a pretty remarkable finding,” Camerer told me. “If you asked most economists how they would produce more trust in a game, they would say change the payoffs or get the participants to play the game repeatedly: those are the standard tools. If you said, ‘Try spraying oxytocin in the nostrils,’ they would say, ‘I don’t know what you’re talking about.’ You’re tricking the brain, and it seems to work.”
… and this…
The results provide further evidence that reason and emotion often compete inside the brain, and it also helps explain a number of puzzling phenomena, such as the popularity of Christmas savings accounts, which people contribute to throughout the year. “Why would anybody put money into a savings account that offers zero interest and imposes a penalty if you withdraw cash early?” Cohen said. “It simply doesn’t make sense in terms of a traditional, rational economic model. The reason is that there is this limbic system that produces a strong drive. When it sees something it likes, it wants it now. So you need some type of pre-commitment device to make people save.”
Laibson and Brigitte Madrian, an economist at the Wharton School, have studied one such “pre-commitment device” for 401(k) plans, which deduct part of an employee’s earnings each month and invest them in stocks and bonds. Because the plans are often optional, many people fail to join them, even when their employers offer to match a portion of their contributions. Laibson and his colleagues have called for people to be automatically included in the plans unless they choose to opt out. At companies that have adopted such a policy, enrollment rates have increased sharply.
Reforming 401(k) plans is an example of “asymmetric paternalism,” a new political philosophy based on the idea of saving people from the vagaries of their limbic regions. Warning labels on tobacco and potentially harmful foods are similarly intended to keep subcortical structures in check. Neuroeconomists have suggested additional policies, including warning buyers of lottery tickets that their chances of winning are practically nonexistent and imposing mandatory “cooling off” periods before people make big-ticket purchases, such as cars and boats. “Asymmetric paternalism helps those whose rationality is bounded from making a costly mistake and harms more rational folks very little,” Camerer, Loewenstein, and three colleagues wrote in a 2003 issue of the University of Pennsylvania Law Review. “Such policies should appeal to everyone across the political spectrum.”
The results provide further evidence that reason and emotion often compete inside the brain, and it also helps explain a number of puzzling phenomena, such as the popularity of Christmas savings accounts, which people contribute to throughout the year. “Why would anybody put money into a savings account that offers zero interest and imposes a penalty if you withdraw cash early?” Cohen said. “It simply doesn’t make sense in terms of a traditional, rational economic model. The reason is that there is this limbic system that produces a strong drive. When it sees something it likes, it wants it now. So you need some type of pre-commitment device to make people save.”
Laibson and Brigitte Madrian, an economist at the Wharton School, have studied one such “pre-commitment device” for 401(k) plans, which deduct part of an employee’s earnings each month and invest them in stocks and bonds. Because the plans are often optional, many people fail to join them, even when their employers offer to match a portion of their contributions. Laibson and his colleagues have called for people to be automatically included in the plans unless they choose to opt out. At companies that have adopted such a policy, enrollment rates have increased sharply.
Reforming 401(k) plans is an example of “asymmetric paternalism,” a new political philosophy based on the idea of saving people from the vagaries of their limbic regions. Warning labels on tobacco and potentially harmful foods are similarly intended to keep subcortical structures in check. Neuroeconomists have suggested additional policies, including warning buyers of lottery tickets that their chances of winning are practically nonexistent and imposing mandatory “cooling off” periods before people make big-ticket purchases, such as cars and boats. “Asymmetric paternalism helps those whose rationality is bounded from making a costly mistake and harms more rational folks very little,” Camerer, Loewenstein, and three colleagues wrote in a 2003 issue of the University of Pennsylvania Law Review. “Such policies should appeal to everyone across the political spectrum.”
Read more: Mind Games: What neuroeconomics tells us about money and the brain
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