Neuroeconomics — generally viewed a combination of economics, neuroscience and psychology — tries to shed light on the biological elements of our decision-making. Why do investors do what they do? Why are some people stingy and others generous? What makes a consumer decide between buying a handbag and stuffing the piggy bank? Building on the work of behavioral economists, neuroeconomists have begun to apply their tools to these kinds of questions, often with illuminating results.
Paul Zak, a professor of economics, psychology and management at Claremont Graduate University, is founding director of the Center for Neuroeconomics Studies. Here’s a guest post he has written about his research on oxytocin — or, as he puts it below, “the moral molecule.”
Economist as Therapist
By Paul Zak
People make mistakes. Freakonomics documented many of the poor decisions people make on a regular basis. While I know none of you readers have ever made a bad decision, think of your brother-in-law’s investment in that scuba shop in Albuquerque. Or the geniuses at Lehman Brothers–not so wise. So, if we have such big brains, why do we make so many mistakes?
We’ll get to that in a minute, but since we do make mistakes with money, should economists get into the therapy business?
Richard Thaler and Cass Sunstein have come down strongly on the side of therapy in their book Nudge. Thaler, one of the founders of behavioral economics, has spent much of his career documenting the systematic mistakes people make. Thaler and Sunstein’s idea is to guide decisions using “choice architecture” that uses people’s biases to help them make better decisions.
There are at least two problems with this approach. The first is the slippery slope argument: Americans drink too many sugary sodas, so let’s tax them or make them harder to get. While this may enhance health, it is an affront to personal liberty. If you like Coke, do you want “choice architects” in Washington saying you can’t have them? What’s next, prohibiting hot dogs? The second problem is that knowing that people make poor decisions doesn’t get to the heart of the problem–why are they making these choices? Economics has no answer other than “they must like it.”
This is where neuroeconomics, a field I helped start, comes in. It uses the techniques of neuroscience to measure brain activity while humans and animals make decisions. This opens the “black box” behind economic decisions (and cognitive psychology) to reveal why people are doing what they are doing. Indeed, I began doing neuroeconomics studies in 2001 out of frustration–people in experiments could not tell me why they were making particular choices. By measuring brain activity, I could build better economic models by looking at the real reasons for decisions. We do this by measuring brain activity while people make decisions in MRI scanners, or measuring neurotransmitters in blood, or turning on or turning off parts of the brain using magnetic pulses or drugs.
Which is how I got into the therapy business. Well, at least what passes for therapy on TV, call it “theratainment.” I was recently (April 27, 2010) on the Dr. Phil show as part of a panel of experts discussing why men cheat on their wives and girlfriends. Hey, that sounds like real therapy.
Here’s why: my claim to fame is that I discovered that a hormone and neurotransmitter called oxytocin motivates us to trust complete strangers with money on the expectation that such trust will earn us a return. I did this first by taking blood from people in money exchange experiments (with collaborators Bill Matzner and Rob Kurzban). We found that the more money-denoting trust a person received, the more his or her brain released oxytocin. And the more oxytocin on board, the more the trustee returned some of the money he had received (which tripled in value) to the person who had trusted him. Oxytocin acts like a moral molecule, inducing trustworthiness. About 90% of people who had shown trust in a stranger were not disappointed — their trust was returned and they left the lab with additional money. This helps explain why we trust all kinds of strangers outside the lab.
Next, I shot synthetic oxytocin into the brains of hundreds of people using a nasal spray (no needles into the brain!). I found that oxytocin caused people to trust others with their money more; and to be more generous when asked to share money; and even to donate more money to charity. Oxytocin seems to change the balance between self and other. This is a huge issue in economics because traditional economics assumes people are selfishly motivated, even though this runs counter to a vast amount of evidence. Now we know why we are not all selfish: as social creatures we evolved a biological mechanism to motivate cooperation.
In other studies, I found I could inhibit prosocial tendencies. For example, I recently administered synthetic testosterone to men, roughly doubling their testosterone levels. This made the men in our study (compared to themselves on placebo) more self-focused and stingy with money, and more aggressive when given an option to punish someone who was being stingy towards them. Why? Testosterone inhibits the action of oxytocin.
Fast forward five years to Dr. Phil. Before my research, oxytocin was known solely as a reproductive hormone, released during sex and childbirth and sometimes called the “cuddle hormone.” Testosterone had been known previously to potently affect libido. My neuroeconomics studies (with the help of many collaborators) had gone further and shown that these hormones also change the brain’s cost-benefit analysis in powerful ways. The couple who appeared on Dr. Phil with me, Jose and Angela, were in trouble. Jose had cheated on Angela and was facing an imminent divorce so he agreed to come on the show. (Dr. Phil, quite ethically, pays for three months of therapy for guests on his show.) We experts were going to explain why men like Jose cheat and what he could do to stop making these selfish and shortsighted choices (Jose and Angela had just had a baby when he cheated on her).
I’m not sure if I and the other experts helped Jose and Angela, but at least we got to explain the science behind Jose’s behavior. I suspected that Jose had high testosterone levels — he took all kind of risks when skydiving and playing extreme sports because he enjoyed the thrills. Illicit sex was another thrill he sought out. His testosterone inhibited his “care-for-others” brain mechanism that typically motivates attachment to a spouse and love for a child; and now he was facing a divorce. Let’s see, risky behaviors leading to a downfall. That sounds a lot like what happened at a dozen Wall Street investment houses in the last couple of years. Maybe its time for neuroeconomics to be used in the design of regulatory policies.
Knowing why we do what we do is the first step to improved decision-making, and this is exactly the promise of neuroeconomics.