Sensible irrationality?

I recently posted on neuroeconomics, which attempts to understand the neural basis for human decision-making. One of the primary motivations of the field is understanding the irrationality of our decisions; i.e. why they are often contrary to the logical choices that would maximize one's personal outcome. Mind Hacks has a post on a recent Scientific American article that discusses "how [some of] our decisions are often irrational in game theory terms, but can still be more beneficial than the supposed rational choice." The article is free, and offers an interesting perspective on "rationality" verus "common sense."

The gay science

Over the centuries since Adam Smith, economists have developed mathematical frameworks for maximizing economic success. However, despite the intellectual power of these theories and the often simple logic involved in their calculations, humans continue to amass credit card debt, default on loans, fail to save for retirement, and on the whole refuse to do what these rational, reward-maximizing equations tell them to do.

The irrationality of human decision-making attracts the fierce interest of two very different fields: neuroscience and economics. Economic theories of human decision-making are essentially based on two parameters: what something is worth and the probability of its occurrence. Neuroscientists, on the other hand, think of decision-making as a product of physical neural circuits: sensory information enters the brain, journeys through the brain where a decision is "made," and eventually exits the brain to evoke bodily responses. Economics ignores these biological, more proximal roots of behavior, whereas neuroscience ignores the economic goals that ultimately guide our decisions.

These two approaches have recently been integrated in the hybrid field of neuroeconomics. Neuroeconomics attempts to unify abstract economic variables with neuroanatomy, and thus understand the physical mechanisms by which our brains make decisions. The basic premise is that somewhere along the sensory-motor circuit are the neural substrates that represent "value" and "probability." These areas must interact and influence the flow of information along the circuit, thereby prompting a certain decision and its subsequent behavior. The most pressing questions, then, are how and where these abstract variables are combined in the brain, and the dynamics of the neural computation which engenders a "decision."

Inherently, neuroeconomics is not a means to exploit the free market by, for example, scanning the brains of consumers to calculate the maximum price they will willingly pay for a good. Although such endeavors are opportune beneficiaries of this sort of research, I believe neuroeconomics to have grander, more noble intentions. As a neuroscientist, I view neuroeconomics with bright, hopeful eyes, eager for the insight that economics can lend the neurobiological study of human behaviors. Although the former "dismal science" is abstract and far removed from biological mechanisms, it offers one thing behavioral studies tend to lack: great mathematical beauty.

Because economists base their models on optimal behavior, they have the ability to develop a precise, unified framework for interpreting human behavior; the thesis is, essentially, that humans choose alternatives that maximize rewards. Neuroeconomics draws upon the precision and rigor of the formal models of economics to go beyond the sensory-motor circuit, allowing opportunities for understanding the neural basis of more abstract economic ideas, such as value and the profitabilities of outcomes (a bit more challenging to study than sensory and motor systems). Thus, the principles of economics allows neuroscientists to explore the physical mechanisms underlying high level cognitive processes.

Particularly intriguing subjects for these studies are human choices that violate simple logic,; those which are neither selfish nor generous but blatantly, unbiasedly, irrational. I've previously explored irrational behavior in my post on risk aversion; another interesting example is "time inconsistency." When people make decisions about the distant future, they tend to behave as rationally as economic equations dictate. In contrast, when faced with the same decision relating to the near future, they are reckless and impulsive, unwilling to delay gratification. For example, when people are offered the choice of $20 now or $22 in a month, they often choose to receive the smaller amount immediately. However, if given the choice between $20 in a year or $22 in a year and one month, they will choose the higher, delayed amount. This is irrational; in both situations, the time delay (1 month) and financial gain ($2) are equal, so the decision should be the same (the higher amount should always be chosen.)

Another example of irrational impulsivity is less quantitative than the above, but involves a more flagrant demonstration of vice versus virtue. If offered the choice of a chocolate bar now or an apple now, most people demand immediate gratification and will choose chocolate. But if offered to receive a chocolate bar in one week or an apple in one week, people will consider the long-term effects of each and prefer the apple.

Back in 2004, Jon Cohen, Director for the Study of Brain, Mind, and Behavior of Princeton University, teamed up with George Loewenstein of Carnegie Mellon to take a neuroeconomic approach to this perplexing behavior. Using fMRI, they searched for changes in brain activity as the subjects made decisions between small immediate rewards or larger delayed rewards, attempting to link irrational displays of time-inconsistency with brain activity. The results, published in Science, suggested that decisions involved with the possibility of immediate reward activated the limbic system, which is associated with emotion, while both short- and long-term decisions activated the prefrontal cortex (PFC), associated with logical, abstract reasoning.

Interestingly, when students had the choice of an immediate reward but chose the larger, delayed option, the PFC was more strongly activated than the limbic system. In contrast, when they chose the immediate reward, the activity of the two regions was similar (with a trend toward more activity in the limbic system.) This data suggests that both systems are involved in the neural representation of "value," and that the decision-making process is guided by, as the authors state rather poetically, "a competition between the impetuous limbic grasshopper and the provident prefrontal ant within each of us."

Thus, by exploring the neural processes by which the brain generates economic decisions, the authors were able to gain insight into the circuit-level computations that may govern complex behaviors. The extent to which the computations of economic theory can truly be generalized to the computations performed by the brain (as well as to more complex decision tasks) is unknown, but the aims and progress of this field are promising. From the economist's point of view, neuroeconomics may be far "messier" than economics, but the theoretical analysis of what humans should do isn't, to me, nearly as fascinating as understanding what they actually do, and neuroeconomics brings us far closer to reality.

Reference:
McClure SM, Laibson DI, Loewenstein G, Cohen JD. Separate neural systems value immediate and delayed monetary rewards. Science 306(5695):503-7 (2004).

Wanna bet?

Imagine a coin toss in which you could win $50 for heads, but would lose $50 for tails. Would you take that bet?

What about winning $1,000,000 for heads, or losing $50 for tails?

Winning $75 or losing $50?

Most of us would not accept the first bet, but would certainly accept the second. The third option is a bit more ambiguous. Even though the potential gain is 50% greater than the potential loss, and the probability of each outcome is equal, most people would not take that third bet. Humans are peculiarly averse to risk; that is, we are more sensitive to potential losses than to potential gains. In fact, for the average person, losses are about twice as psychologically powerful as gains. Behavioral risk aversion (BRA) is the lowest Reward/Loss ratio an individual will accept. Since the average person will not take a 50/50 bet(such as a coin toss) unless the potential gain is at least twice as high as the potential risk, their BRA is about 2.

If you think about this logically, anyone with a BRA value greater or less than 1.0 is behaving irrationally (though not quite as irrationally as this man). If there is a 50/50 chance of gaining or losing money, one should feel neutral about accepting a bet for +$50/-$50, and accept all bets that have a greater potential pay-off than potential loss, including +$51/-$49. Accepting a +$51/-$49 gamble may seem foolhardy but if the game is fair, and enough coins are tossed, you will come out with a profit.

Of course, there are many instances in which our "irrational" aversion to loss is actually quite rational. For example, if a person only has $50, earning $50 would merely double their wealth. Although this outcome is desirable, it is too trivial to motivate risking complete bankruptcy. In this situation, a "rational" person should reject this gamble, for the sake of his or her survival. Thus, although our aversion to loss results from a distorted perception of reality (maintaining a greater subjective value for a loss relative to a gain), it can protect us from getting ourselves into dangerous situations.

Let's go back to the +$51/-$49 bet with 50/50 odds, and assume you have a bit more of a buffer in your bank account than in the previous example. Although the most logical decision would be to accept the bet, most people would not do so. Clearly, humans do not use their powers of reason alone. Our emotions play a powerful role in our assessment of risk, eliciting instinctive responses that are a product of millions of years of evolution. Indeed, loss aversion has been observed in capuchin monkeys and children as young as five, suggesting that it may be a fundamental adaptation of the primate brain.

How does our intuitive biology render the subjective impact of losses as significantly greater than that of gains? What happens in the brain? Are there specific circuits that deal with reason, contending with those that deal with emotion? Are there circuits that are triggered by potential loss, communicating with those triggered by potential gain? Or does risk evaluation involve a single neural system that assigns subjective value to both potential risks and losses? A team of researchers led by Russell Poldrack of UCLA explored these questions and claimed to find a link between certain brain areas and the innate aversion to risk, publishing their intriguing results in Science.

The researchers presented 16 college-aged subjects with 256 different combinations of potential gains and losses (e.g. +$36/-$20); all gambles were coin tosses bearing a 50% chance of either outcome. While the subjects decided whether or not to accept the bets, the researchers used functional magnetic resonance imaging (fMRI) to determine which areas of the brain were active. Analysis of the fMRI results revealed regions that became more active as the potential rewards grew and the bets became more attractive. These areas included the "reward centers," such as the prefrontal cortex and ventral striatum, which are also activated when eating chocolate, hearing pleasing music, and taking cocaine.

What about when the potential loss increased? Surprisingly, when the subjects evaluated the possibility of losing money, the areas associated with negative emotions, such as fear and anxiety, were not activated. In fact, there were no areas that became more activated in response to increased potential loss. Instead, such scenarios silenced the areas that had been activated in response to potential gain. Notably, these areas were turned down in response to potential loss more strongly than they were turned up by potential gain. In other words, the neural response to potential loss was stronger than the neural response to potential gain; the activity in these neural circuits thus mirrored the subjects' behavioral aversion to risk.

The researchers then looked at individual differences between subjects to determine the extent to which a person's brain activity could predict their aversion to loss. For each subject, the researchers analyzed the data from all 256 evaluations to determine their BRA. Across all subjects, the median BRA value was 1.93, and ranged from 0.99-6.75. When they focused on the brain activity of subjects who were least averse to risk (low BRAs), they found that these brains had the weakest responses to both potential losses and potential gains. These results indicate that relative to people who are risk averse, risk takers have an overall diminished response to both gains and losses. To take this result beyond a coin toss, this may provide a neural basis for why certain individuals are more likely to be involved in risky behaviors such as base jumping and stock trading: they seek greater gains regardless of the increasing potential loss because their brains are less sensitive to both.

Human irrationality and our inability to logically assess risk are fascinating phenomena, and this study is an exciting demonstration of a neural basis for this behavior.


Reference: Tom SM et al (2007). The neural basis of loss aversion in decision-making under risk. Science.