Personal Finance Tips | Psychology Of Money | How To Manage My Spending | Behavioral Economics | Behavioral Science


©2018 by Merle van den Akker

Money on the Brain: Neuroeconomics

I have mentioned Neuroeconomics a couple of times on this blog already. I have reviewed the module in the MSc Behavioural and Economic Science, I have expressed my excitement at teaching it (which fell through this year) and just my love for the field. But what I have neglected to do so far is to explain what the field of Neuroeconomics actually entails and how it compliments fields such as economics and behavioural article.

So in this article we are going to look at the difference between money on the mind, and money on the brain!

Neuroscience vs Economics Unsurprising, Neuroeconomics is a blend of neuroscience and economics. It has to be mentioned, the neuroscience applied to this field is that of cognitive neuroscience, meaning that cognition stands at the heart of it, or for people who do not have a background in this: there are a lot of psychology-based theories underlying the explanations given by Neuroeconomics. So overall, the field combines economics, neuroscience and psychology.

Now if you think three fields is a bit much, you are not wrong. It is a lot. However, it is not as if all of the fields are applied to create Neuroeconomics. The field is best explained by showing how it picks from the three fields: Neuroeconomics uses the methodologies from neuroscience, to answer questions asked by the field of economics, with strong theoretical roots in psychology.

A great example of this, from my own field is the pain of paying. The question itself is economic: why do some people spend more easily than others? The explanation is psychological: The process of exchanging money for goods/services is a process of acquisition, but also of loss. You are losing money at the same time. People are loss averse, they do not enjoy the negative feelings of loss. Now, some people experience more negative emotions, or experience these emotions more intensely than others. These negative emotions have been dubbed the pain of paying. The more sensitive a person is to this type of pain, the less likely that person is to spend money.

The evidence for this theory is provided by the field of neuroeconomics. Research by Rick et al. (2007) shows that when going through the process of purchasing, insular activity increases. The insula has been associated with the experiencing of the six basics emotions, but has also put a strong emphasis on the experience of pain. The higher the levels of activity in the insula, the less likely a participant was to purchase a product. As such, the pain of paying works as an inhibitor of spending money. People that do not experience this pain as intensely, or not at all, are, according to this research, spendthrifts. They have less to no inhibition of their spending at all, and as a result spend more and more often. These are also the type of people most prone to compulsive buying behaviour.

Aims and Focus Now neuroeconomics focusses on more than just whether or not people decide to buy, or not to buy a product. Neuroeconomic research focusses on decision-making, and how it shows up in the brain. The main research areas of interest are: decision-making under risk and ambiguity, loss aversion, intertemporal choice, and social and moral decision-making. Different parts of the brain can be responsible for such decisions, however, when choosing between two (or more options), people often calculate (or try putting some type of) a value so the choice option with the highest value gets selected. The calculating of these values and which choice is best depends on how risky a choice is (how likely are you to actually get the benefits of this choice?), when the benefits of choice are paid out (immediately, within ten years etc.), and whether this is a decision to benefit only you, also for others, or to the detriment of others. Because all of these processes calculate some type of a value, there can be a high overlap in which areas of the brain do what we think they do. Therefore, doing and interpreting neuroscientific results can be incredibly difficult.

A subfield of neuroeconomics that has generated a lot of attention lately is that of neuromarketing. It can be argued that neuroeconomics is more academic and theoretical, whereas neuromarketing is an applied field which uses neuroimaging tools for market investigations. So this field does have a strong focus on why people do, or do not buy products, and how they can be made more likely to buy, given what we know about the brain processes underlying this decision-making process.

Methods As it is the methodologies of neuroscience that put the neuro in neuroeconomics, it is important to outline what these methods are. Obviously, when studying the brain and its functioning, the methodologies mainly focus on showing (changes) in brain functioning. This needs to be done by measuring the levels of activity before, during and after the experiment. There are several methods used for this. I will describe the most popular ones below:

EEG Electroencephalography is used to record electrical activity of the brain. It is (typically) non-invasive. This methods measures voltage fluctuations, that result from ionic current within the neurons of the brain. These fluctuations can be measured by the electrodes that are placed along the scalp. When this method is used non-evasively (meaning your head is not being cut open), it is limited in how much it can measure. EEG suffers from low spatial resolution on the scalp. EEG requires intense interpretation just to hypothesize what areas are activated by a particular response. Another issue is that, because the electrodes are placed along the scalp, the fluctuations it can measure are quite superficial, meaning it poorly measures neural activity that occurs below the upper layers of the brain (the cortex). It also fails to identify specific locations in the brain at which various neurotransmitters, drugs, etc. can be found. The process of connecting participants is also quite intense (read: long) and because of the other limitations already mentioned, rather large numbers of subjects are needed to extract useful information from EEG, making the process even longer.

fMRI A method that has dealt with some of the issues experienced with EEG is fMRI, but it comes at a price, literally… Functional magnetic resonance imaging measures brain activity by detecting changes associated with blood flow (BOLD). This technique relies on the fact that cerebral blood flow and neuronal activation are coupled. When an area of the brain is in use, blood flow to that region also increases, as such, claims can be made regarding increased neural activity.

When partaking in fMRI based research, participants should lie still. Very still. This is one of the disadvantages of the method. Because it is a method that use imaging, and the brain is quite a detailed area, movement just ruins the picture. Any movement can lead to artificial intensity changes of the fMRI signal. Another issue is what comes of the images have been made. There is a lot of (statistical) correction needed when analysing the voxels (3D pixels), of which the image is made up of. If this is not done correctly, you can find very high levels of brain activity (measured in BOLD), even in a dead salmon (Sanders, 2009).

Yet another issue is what is known as reverse inference. We conduct our research on one process, say the pain of paying. We expect the insular cortex to light up. It does. Splendid. We have found that. However, some brain areas have multiple functions, and we are aware of those. Maybe the insular cortex is not lighting up because of the pain of paying, but because of any of the other functions it has also been associated with. We saw what we expected to see, and as such we conclude that our theory is right, but it need not be.

Optogenetics Let us now look at a method that does have a most definite causal effect in hand: optogenetics. This is an incredibly invasive method of neuroscientific research that is rarely applied to humans. It is a neuromodulation method that uses a combination of techniques from optics and genetics to control and monitor the activities of individual neurons in living tissue and to precisely measure these manipulation effects in real-time, as such causal relations can be established, without the reverse inference issue. It does so by using light to control cells in living tissue, typically neurons, that have been genetically modified to express light-sensitive ion channels. Within this article, I will not get too technical, as I can hardly explain this method myself properly.

The biggest disadvantage of this method: it is in the early stages of its development, it is pretty exclusive to mice only, and even within that species there are some issues. The method relies on light sensitivity that is often genetically modified. This does not always work as well as hoped. Simple as that.

Now I know this article was a long read. And maybe some of the detailed explanation of the methods used was a bit much. Neuroeconomics is a complicated field, just as neuroscience is a complicated field, but I will try to explain and promote in an accessible way, that makes it interesting for all of us. Because honestly, it is SUPER COOL. In the upcoming articles I will look into the relationship between neural functioning and time perception, how and why we learn things and why we enjoy games so much, but also how a lot of stuff claiming to be neuroscientific evidence is bullshit. Stay tuned!

References Rick, S. I., Cryder, C. E., & Loewenstein, G. (2007). Tightwads and spendthrifts. Journal of Consumer Research, 34(6), 767-782.

Sanders, L. (2009). Trawling the brain: New findings raise questions about reliability of fMRI as gauge of neural activity. Science News, 176(13), 16-20.