Neuroeconomics

Ambiguity and Pessimism Bias

Although Saturday Night Live may be in the midst of a prolonged rough stretch, Debbie Downer is one of my all-time favorite characters (see a video or the Wikipedia entry). For those who are unfamiliar, the central figure in these sketches is a miserable cynic who constantly rains pessimism on others’ parades. A recent study, published in NeuroImage, examines if this type of behavior has neural underpinnings:

Based on the assumption that information processing is biased towards potentially negative events in order to prepare response strategies efficiently for coping with unfavorable consequences, we hypothesized that emotion processing brain areas are activated during ‘unknown’ expectation which are also activated during expectation of negative events.

 Here is the authors’ main result:

Taken together, we found evidence for a ‘medial-thalmic-insular-inferior-frontal-rubral’ circuit associated with expecting events of unknown emotional valence, the activity of which resembled the expectation of negative events and also correlated with individual depressiveness. The revealed areas are consistent with the proposed ‘ventral system’ of emotion processing for identification of the emotional significance of a stimulus, production of affective state, and autonomic response regulation…Our results are consistent with the view of brain activity reflecting a ‘pessimistic’ or ‘cautious’ bias toward future events.

Apparently, we’re all wired to be downers in a world characterized by pervasive ambiguity. Somewhere in the course of human evolution, though, people’s views toward their pessimistic peers have changed – whereas downers of the distant past likely served to possess and distribute valuable information, they’re a drag in 21^st-century America. What used to be an advantageous survival strategy is now, at least in well-off societies, a social nuisance and an object of mockery. Is this transformation not a testament to how well off we have become? 

Are we bad forecasters?

Predications of emotional impact weigh heavily on decisions. In fact, people avoid risk even when faced with the prospect of large gain (PDF), predicting loss will hurt them much more than an equal gain will please them. If that is true, this phenomenon (termed loss aversion) is simply a rational product of accurate affective forecasting.  Currently, research seems split on this question.  Studies have indicated that loss induces more intense neural activity, indicating that our forecasting may be valid.  However, behavioral economics generally proposes that we are bad forecasters, and studies show that we consistently overestimate the intensity of emotion from life tragedy.

In a new study, participants effectively minimized impact of loss after a game of luck using various coping mechanisms, such as dissonance reduction, self-affirmation, motivated reasoning, and positive illusions (PDF). Researchers found that “there was no evidence that losing actually had a greater emotional impact than winning,” showing we are indeed poor loss forecasters.

So what of studies reporting more intense neural response to loss?  Those studies could be measuring only very immediate effects before subjects could employ the above coping mechanisms.   However, until further research is done, it seems that the current study should be taken simply to show that, as with other losses, we have effective methods of coping with monetary loss that we do not factor in to our affective forecasts.

Interestingly, participants were far better at assessing levels of positive affect from winning; in one of the two games participant guesses were spot-on, and in the other were very close.

Neuroeconomics and Rationality

We have posted the latest draft of an article on the implications of neuroeconomic research on the concept of rationality.  See http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=224472 .  Comments are most definitely welcome.