Neurons and financial decisions

Tags: Knowledge

A study has revealed that emotions can play a significant role when it comes to making important financial decisions

Neurons and financial decisions
Neurons can provide insights into how people make decisions about money matters. Researchers Camelia Kuhnen and Brian Knutson, authors of “The neural basis of financial risk-taking,” say that rational and irrational financial decisions are influenced by the two parts of the brain that are linked to excitement and anxiety. Their collaborative study has shown that emotion can affect a person when it comes to making investments.

They say people are not as rational as we would like them to be. The part of the brain linked to emotion is the nucleus accumbens (nacc). This peanut-sized area becomes active when we expect a reward of a primary nature, such as water if a person is thirsty. The other part of the brain linked to anxiety, anterior insula, lights up when a person sees disgusting, repulsive stimuli or when someone anticipates physical pain. According to the researchers, if the emotional states of individuals are included in rational decision-making models, people will be able to make better financial choices.

The institutions encouraging “risk-seeking” (such as casinos) and “risk-averse” (such as insurance companies) behaviour know and understand how excitement and anxiety influence people’s decisions. The researchers say that one tends to be more risk-seeking when the nacc is activated. “You tend to choose the stock more often and you tend to choose it when you shouldn’t”. An insurance company can do the opposite to appeal the opposite emotions. The studies show that high insula activation is a predictor of one making a risk-averse choice. “If you go to an insurance office, people will show you pictures of crashes or tell you how you could be hurt”. Such stimuli might activate your anterior insula.

Researchers say that the part of the brain associated with disgust kicks in when people reject a low, unfairly priced offer. There seems to be an impulse to punish stinginess even at the expense of personal gain. “The stingier the offer, the more insula activity”, say the researchers. When the offer seems fairer, a brain region linked to reasoning becomes more active. In case of “overbidding”, an area associated with rewards gets activated. It appears from the studies that the desire for justice can trump people’s rational desire to get more. Their advice to us: when making a big decision, take a step back and think before plunging. Ask yourself if it is your true preference. Another researcher who is involved in studying the association of brain regions with altruism and selfishness thinks that altruists have more neurons in a region called the right temporo-parietal junction, an area of the brain that has been linked to empathy. They say selfish people have a smaller junction. Some neuroeconomists think decision tendencies are heritable.

Neuroscientists think they are doing their bit but are not happy the way economists are responding to their ideas. “We’ve taken a lot of mathematical models from economics to help describe what we see happening in the brain. But economists have been a lot slower to use any of our ideas” thinks one such researcher. Some even call it “The case for mindless economics”. One economist puts it thus: “Look, if you are trying to understand a pilot’s ability to land a crippled plane, it’s not the patterns of his neuron firing that’s important, it’s the experience and training that he’s had, and the result of the landing.

Neuroeconomics hasn’t offered anything that can improve on those measures.” Some neuroeconomists, however, think that this science could be very big if models of mental processes can improve an economist’s ability to predict the behaviour of the people. Researchers are therefore trying to build mathematical models that account for variance in people’s perceptions. What standard economic theories treat as anomalies, should they be shrugged off, is the question they are asking.

(The writer is a biotechnologist and ED, Birla Institute of Scientific Research, Jaipur)


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