Taking too many financial risks? Blame your brain
New study suggests some may be predisposed to bad money choices
Are you a sucker for a sexy teaser rate? A pushover for an adjustable-rate mortgage?
A new study suggests you may be predisposed to make risky financial decisions by the same part of your brain that contributes to gambling and shopping addiction.
Scott Huettel, co-director of the Center for Neuroeconomic Studies at Duke University, is the senior author of the study, "Separate Neural Mechanisms Underlie Choices and Strategic Preferences in Risky Decision Making," published online in the scientific journal "Neuron."
Using functional magnetic resonance imaging (fMRI), the Duke team monitored patterns of activation in the ventral striatum region of the midbrain of 23 test subjects while they evaluated complex multi-outcome lotteries similar to real-life financial decisions. Each subject played for real money by selecting among lotteries presented on goggles while enclosed in the tube-like fMRI scanner.
The brain's reward center
The ventral striatum has long been studied as the reward center of the brain. Remember the experiment where lab rats preferred to self-administer dopamine over food or cocaine? Many of those dopamine-sensitive neurons reside in the ventral striatum. It's also closely linked to brain regions important for emotion and motivation.
Are you a simplifier who ends up taking financial risks? Or a maximizer who evaluates thoroughly? Take an interactive one-question quiz to see how your ventral striatum does.
Because the ventral striatum plays a critical role in our appetitive impulses, it has captured the attention of the emerging interdisciplinary field of neuroeconomics, which hopes it will hold clues to why people sometimes act irrationally when it comes to money.
The Duke study found a correlation between activity within the ventral striatum and seemingly irrational financial decision-making. "Prior studies have shown that many people simplify complex decisions. Instead of optimizing by using all the information, people code each potential outcome as good or bad and then choose whatever option gives them the most good or fewest bad outcomes," Huettel explains.
Those people who tended to simplify the complex financial lotteries showed heightened activity in this brain region whenever they won or lost money, compared to those who made more rational choices. Simply put, if your brain is very sensitive to good versus bad, then your decision-making might focus on only those black-and-white aspects of decision-making and ignore the shades of gray.
The finding may provide clues to why we make financial belly flops.
It's not hard to see why teaser rates and similar marketing strategies continue to attract new card customers. We all tend to be simplifiers, not economically rational maximizers when faced with mind-numbing pages of legal fine print.
Oversimplifying: Risky with credit cards
"Like many other decisions, choosing a credit card might get simplified into a small set of rules," says Huettel. "The good factors: this card is cool looking, it makes me feel good when I use it and it has a low introductory rate. The bad factors: the rates are going to go up, but I'll have paid it off by then."
"Even though the decision should involve estimating the probability that you will pay it off or that a life event may keep you from paying it off, those sorts of things don't enter into the calculation."
The Credit CARD Act of 2009 attempts to mitigate this self-destructive, knee-jerk reaction by requiring credit card companies to post their agreements online.
"We have to recognize that many people are going to try to simplify things, especially in contexts where there are very salient gains and losses, obvious good and bad outcomes," says Huettel. "Given that tendency, then information should be presented so the important factors remain, even after simplifying."
The fluctuations of our dopamine neurons fall short of explaining the full range of irrational behavior, however. A blind optimist, for instance, may be a perfectly good decision-maker, but really bad at identifying probabilities. Similarly, an adolescent may be fairly rational when it comes to making a decision, but terrible at perceiving risks.
The brain out of its comfort zone
Then there's the "Slumdog Millionaire" scenario.
"On game shows, people often make decisions that are patently unreasonable; if they were presented with the same risks in everyday life, they'd probably make very different decisions," says Huettel. "But under the circumstances of a game show, when someone is pulled outside of their normal environment, and they don't have the time to deliberate, then they can make the same sort of snap decision they might make at a supermarket."
Despite the power of neuroscience to look inside the brain, Vinod Venkatraman, a graduate student at Duke and lead author of the study, emphasizes caution. "Functional MRI is not a mind-reading technique. Instead, it can help us understand how decision making differs from person to person, which may be useful for shaping public policy or developing personalized training programs."
Huettel allows that his research is far more likely to benefit credit card companies than Joe and Jane Consumer.
"It's easier to see how Visa or MasterCard or any corporation or policymaker could use this sort of data than it is one consumer. It allows us to look under the hood," he says. "But we want to get away from the idea that people are going to use this research by just putting people in scanners, showing them commercials and deciding if it's a good ad or not. That's sort of silly."
For consumers, understanding how the brain works to influence our decision-making may help us compensate for our biochemical predispositions.
"The challenge for many people is to recognize their own limitations," says Huettel. "When someone recognizes that their brain often points them toward overly simple solutions to complex problems, it reminds them that they need to step back and look at the details, especially when facing a very emotional decision. This isn't just neuroscience, it's common sense."
Published: July 10, 2009
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