When Daniel Kahneman and Amos Tversky got together in 1969 to study whether people were good at intuitive statistics, the seeds of what would become known as the field of behavioral economics were sown. As economists and psychologists combined their expertise, they were able to show how emotions and cognitive biases can distort decision-making skills, and how people’s intuitive judgments often contradict the assumptions of classical economic theory.
Rationally, we have the ability to make well thought out choices, but our emotions and cognitive biases often lead us astray. It is almost as if we are of two minds that are pulling us in different directions.
Well, that’s not far from the truth. Sigmund Freud recognized it when he wrote:
“When making decisions of minor importance, I always find it advantageous to consider all the pros and cons. In vital matters, however, the decision should come from the unconscious, from somewhere within ourselves.”
Daniel Kahneman recognized it in his recent book, “Thinking Fast and Slow,” by describing how evolution has endowed us with two systems for processing information - one that operates automatically and quickly, with little or no effort and no sense of voluntary control and another that is more deliberative, assessing information and weighing alternative responses.
Jonathan Cohen, co-director of the Princeton Neuroscience Institute, describes these systems as “deliberative” versus “emotional”. He points out “emotions are quick, immediate responses that were developed either through biological or cultural evolution. They are quick and efficient because they are important to survival. If you see a snake ready to strike, you don't want to pause to think, well, is that a toy snake or is that a poisonous snake? You jump — that's the right thing to do — and then think about it later. That emotional fear response to a snake is rational in a world where there are poisonous snakes. Deliberation is exactly what it sounds like, careful thinking about complex relationships. It takes time.”
Because automatic processes hum along below the level of conscious interpretation, we often have surprisingly little insight into the choices we make at this level. These are the gut feelings that often defy explanation (but are often right).
On the other hand, deliberative processes take time and energy, and we often get lazy and rely on “mental short cuts” to make decisions. These cognitive biases (like availability, representativeness and framing) often lead to predictable errors in judgment.
This is where neuroscientists can add to the growing field of behavioral economics. Whereas economists and psychologists hypothesize why people make certain decisions,
neuroscientists use imaging techniques like EEG’s and MRI scans to study the physical changes (e.g., blood flow and the release of dopamine) to see what is happening in people’s brains when they are asked to make choices under uncertainty. These measurements can lend hard evidence to evaluate the theories advanced by behavioral economists.
Moreover, by identifying where and when the most brain activity occurs (e.g. the prefrontal cortex is most associated with deliberative processes whereas the amygdala controls many automatic processes), neuroscientists can begin to understand which processing system is most influential in given decision-making situations.
One application can be seen in an area called neuromarketing. This field attempts to improve things like product design and branding by combining insights from neuroscience, behavioral economics and social psychology. By measuring brain waves while volunteers view ads or commercials, researchers can measure attention, emotion and memory and thereby design advertising that is intended to bypass a person’s rational defenses.
The appeal of this approach to marketers is nicely described by Josh Maday in his article at the-future-of-commerce.com: “What if you could see the neural light show when customers interact with your brand? What if you could see exactly what areas of their brain light up when they talk to their friends about your company?”
The advantages of such information are obvious. Yet, I find it a bit troubling that this new technology to measure thoughts and emotions is being deployed to sell us things. I already have Siri listening in on my conversations. I’m not sure I want her cousin probing my brain as well.
Fortunately, there are other applications of the interplay of neuroscience and behavioral economics that have more ambitious goals. Michael W. Richardson lists some of these on the website BrainFacts.org.
“Research on autism spectrum disorders is discovering promising treatments, but also revealing opportunities for workplaces to employ the unique abilities of neuro-diverse people. Research into reward pathways and the way your brain promotes impulsive behavior can help to prevent your making purchases and decisions you'd regret. Scientists are also studying unconscious biases and discrimination to help eliminate negative prejudices in hiring and employment.”
Neuroeconomics has challenged the notion that decision-making is a unitary process and has suggested that it is, instead, a result of the interactions between the automatic and deliberative processes of our brain. Combined with the findings of behavioral economics, we are now well on our way to a better understanding of how to avoid the missteps that result in poor decisions.
This concludes my five-part series on Behavioral Economics. Please feel free to email me with any of your thoughts or questions on this topic. (email@example.com)