Tag Archives: brain

You Can’t Always Like What You Want: Recent Neuroscience Research and Economics

Desire isn’t what it used to be.

Recent research [*]  has found that the neural circuits related to “wanting” are different from those for “liking”. In other words, the regions, processes, and pathways in our brains involved with wanting things are not the same of those related to actually enjoying them.

This potentially has big implications in economics. Much economic theory is predicated on the idea that people most want what they will most enjoy. If humans err when choosing what to buy — if they consistently desire things that they won’t actually like — that would undermine this basic economic premise.

We already know of many instances where humans – or at least many humans – make consistently biased  decisions. People tend save too little for the future and later regret it. People tend to charge much more than they can afford to on credit cards, causing them long-term financial and personal problems. People with various forms of addiction cannot help themselves from gambling, or consuming dangerous drugs and alcohol.

In fact, the list of situations and circumstances in which humans intentionally take actions that will make themselves worse off is long and growing. It’s to the point where it’s hard to defend the assumption that people normally act rationally.

In other words, it’s getting easier to argue that individuals’ well-being often could be improved through the right type of government involvement in certain markets.

We’ve know this for some time, of course. The U.S. started the Social Security program in 1935. This wasn’t based on some grand theory of human economic behavior; they simply wanted older Americans to have enough to live on. Since then research in behavioral economics and psychology has found that humans tend to not save enough for the future. We’ve even identified neural circuits that are responsible for this failure. Research has justified the need for Social Security.

And we continue to find more situations where humans don’t act as rationally as economists might like.

None of this can justify unlimited government interference in the economy, of course. This isn’t a blank check for the well-intended policy. Government involvement in any market always has a cost in terms of efficiency, and invariably has unintended and unanticipated effects.

But the more we learn about human behavior and the human brain, the clearer it is that humans are not the perfectly rational and sensible beings that economists once believed they were. And the more it opens up the potential that the right type of government incentives and policies in the right areas could make people better off than they would otherwise be.

[*]  Kringlebach and Berridge, “The Joyful Mind” in Scientific American, August 2012. Click here to view graphic from article.


Credit Cards and Irrationality – Protecting Us from Our Brains

Human beings are rational.

It’s a basic assumption of economics. Humans are rational beings. Homo economici. We don’t intentionally try to make ourselves worse off.

In his book How We Decide, Jonah Lehrer cites a wide range of psychological, behavioral, and economic research to argue that emotions guide many of our economic decisions. He makes the case that emotions are not just irrational feelings of love and hate, but instead are the result of how the human brain is wired.

And these emotions can cause us to do things that are bad for us.

Take credit cards. Buying things with cash activates a part of the brain called the insula. We actually feel a sort of subconscious pain – emotional discomfort – when we spend cash, since we’re physically giving up something.

When we pay by credit cards rather, however, our brains don’t feel the same sense of loss. Brain scans show that paying with credit cards reduces activity in the insula, causing us to feel less discomfort about the purchase. We literally feel it costs less with credit than with cash.

Basic economic theory says there shouldn’t be a difference between paying by cash or by credit card. Both involve the same loss, so we should view both the same. If anything we should feel worse about paying by credit card, since that could result in having to pay interest or late fees, .

But that’s not how the brain sees it. Which is why so many otherwise rational people get in over their heads with credit cards.

I remember when I was in college and got my first credit cards. Even as an arguably intelligent and sensible person, I still fell into the trap and over-extended myself. Fortunately for me, I got a steady job and eventually was able to pay off my debt. But it took many years to do so. If anything had gone wrong before I did – if I’d gotten sick or had lost my job – I could easily have fallen into a vicious cycle of debt dependent. And if that had happened, I doubt that I would now be here writing about the dangers of credit card debt.

Credit card companies know about the brain’s weaknesses and use every trick they can – low introductory rates, fine print, hidden fees – to take advantage of them. And they’re really good at it. So good in fact that millions of Americans get into credit card trouble every year.

It’s easy to say that this is their problem. They got themselves into trouble. Let them get themselves out of it. And there’s some truth to that. Society can’t take responsibility for every bad decision. Choices have consequences. People need to learn that and take responsibility for their own actions.

But a good case can be made for trying to prevent the worst abuses, particularly since neuroscience research – actual brain scans – tells us that it is due to the very way the human brain works.

From a self-interest perspective, having so many people getting into credit crises also isn’t good for society as a whole. People who get in over their heads aren’t able to pay their bills, are likely to have psychological problems, will have more trouble holding on to their jobs, and will have difficulty caring for their children. This makes it more likely that their kids will grow up to have problems in life as well, thus perpetuating the problem.

Fortunately, the U.S. government has been taking steps to curb the worst credit card abuses. The recently-establish Consumer Finance Protection Bureau has taken an aggressive stand against credit card companies that use unethical means to prey on consumers.

I’ve always been opposed to unnecessary government regulation and involvement in the economy. Government regulation imposes a burden on businesses and on society, unless there’s a good and overarching need for it.

In this case there is. There are situations where people do need to be protected from themselves, and this is one of them.

Sometimes people need to be protected from the flaws in our own brains.

It’s only rational.