Why do we make bad money decisions?
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Why do we make bad money decisions?
BOB MOON: We told you earlier about the notion that a little social drinking might help you fatten your wallet. Really? When you’re trying to make money, surely it helps to think clearly. So why is it, then, that so many of us make downright bone-headed decisions when it comes to money?
Enter the neuroeconomist.
Sounds sort of like an academic mash-up between neuroscience and economics. Traditionally, economists study things like markets and inflation. But some of them are messing around with MRI machines these days.
Writer John Cassidy looks into their intriguing studies in the latest issue of the New Yorker:
JOHN CASSIDY: What the neuroeconomists are finding is that emotions like fear and greed are driven by a certain part of the brain. Sometimes, you know, our attempts to reason things through get overtaken by the raging limbic systems and fear and greed take over as the people on the floor of the stock exchange knew all along. But now we can show scientifically that they were right.
MOON: One of the things that I was most intrigued by in your article was that you can actually account for people whose brains are, I guess you could say, less fearful than others and how that might affect their decisions, particularly their financial decisions. Do these people stand to do better or worse with their investment decisions?
CASSIDY: The theory is that because normal people allow their emotions and their fear to take over, that may put them off some risky but valuable and worthwhile choices. So what the neuroeconomists have done, they’ve done experiments with people who have lesions in parts of their brain which control the emotional responses. And what they’ve found in these experiments is that the people with what we would normally regard as brain damage make more rational and sensible choices. And in some of the experiments where you receive rewards in terms of money, they actually made more money than the people with perfectly healthy brains.
MOON: Let’s talk about oxytocin for a moment. You mention in your article researchers administering this hormone to some of their test subjects and that it’s believed to reduce stress, promote social bonding . . .
CASSIDY: What neuroeconomists have done is they’ve set up this sort of trust game which is sort of a social experiment where you have to invest a certain amount of money with another person who then invests it on your behalf. But the twist is that he can then keep as much of the money he wants for himself and give you whatever he decides to give you. And it turns out the people who were given oxytocin were a lot more trusting, invested more, and ended up making a lot more money than the people without it.
MOON: And the body produces this hormone naturally?
CASSIDY: Oxytocin is produced naturally, yes. It’s produced during sex, I understand. During breastfeeding. During lots of intimate social bonding exercises.
MOON: What I think I hear you saying here is that maybe it’s kind of like you shouldn’t shop for groceries when you’re hungry, maybe you shouldn’t be sitting down to do your online stock trading right after you’ve had a good meal or satisfying sexual encounter.
CASSIDY: It’s true. There are endless, sort of, implications with this, sure. Are we gonna have to get a brain scan before we go and make certain investments just to see which parts of the brain are lighting up? Who knows where this is going to lead in the future?
MOON: OK, this is all very fascinating, but if I run a business or I’m a policymaker, what do I do with these findings? What’s the practical benefit here?
CASSIDY: There are some immediate practicial implications. The savings issue is a good one. Because people tend to make short-term decisions, it may be that we have to introduce certain reforms in things like 401k’s so that people have to opt out of a 401k instead of opting in. One of the other suggestions of some of these neuroeconomists is that, for example, we have cooling off periods before you make a big spending decision.
Say you’re walking past a car showroom and you decide to buy a new Mercedes for $90,000. Perhaps you have to wait a day or two to see whether that was actually your rational brain talking or your emotional brain talking.
MOON: OK. John Cassidy is a staff writer for The New Yorker. You can find his story on neuroeconomics in the magazine’s latest edition. Thanks for joining us, Mr. Cassidy.
CASSIDY: Thanks very much for inviting me on.
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