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Annals of Economics September 18, 2006 Issue

Mind Games
What neuroeconomics tells us about money and the brain.

By John Cassidy
September 10, 2006

L ike many people who have accumulated some savings, I invest in the stock
market. Most of my retirement money is invested in mutual funds, but
now and again I also buy individual stocks. My holdings include the oil
company Royal Dutch Shell, the drug company GlaxoSmithKline, and the
phone company British Telecommunication. I like to think that I picked these
stocks because I can discern value where others can’t, but my record hardly
backs this up. I invested in BT in 2001, shortly after the Nasdaq crashed, when
the stock had already fallen substantially, only to watch it slide another !fty per
cent. I should have sold out, but I held on, hoping for a rebound. Five years
later, the stock is trading well below the price I paid for it, and I still own it.

I sometimes wonder what goes on in my head when I make stupid investment

decisions. A few weeks ago, I had a chance to !nd out, when I took part in an
experiment at New York University’s Center for Brain Imaging, in a building
off Washington Square Park. In the lobby, I met Peter Sokol-Hessner, a
twenty-four-year-old graduate student, who escorted me to a control room full

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of computers. Sokol-Hessner is completing a doctorate in psychology, but he is

currently working on a research project in the emerging !eld of
neuroeconomics, which uses state-of-the-art imaging technology to explore the
neural bases of economic decision-making.

Sokol-Hessner is particularly interested in “loss aversion,” which is what I was

suffering from when I refused to sell my BT stock. During the past decade or
so, economists have devised a series of experiments to demonstrate just how
much we dislike losing money. If you present people with an even chance of
winning a hundred and !fty dollars or losing a hundred dollars, most refuse the
gamble, even though it is to their advantage to accept it: if you multiply the
odds of winning—!fty per cent—times a hundred and !fty dollars, minus the
odds of losing—also !fty per cent—times a hundred dollars, you end up with a
gain of twenty-!ve dollars. If you accepted this bet ten times in a row, you
could expect to gain two hundred and !fty dollars. But, when people are
presented with it once, a prospective return of a hundred and !fty dollars isn’t
enough to compensate them for a possible loss of a hundred dollars. In fact,
most people won’t accept the gamble unless the winning stake is raised to two
hundred dollars.

Why are we so averse to losses, even at the expense of gains? At the Center for
Brain Imaging, I removed my belt and shoes and entered a room containing a
big metal box, which measured about six feet by six feet by six feet, with a slim
gurney protruding from one side. It was a magnetic-resonance-imaging
machine, identical to those hospitals use to scan bodies for lesions and tumors.
“As blood pumps through the brain, the oxygen it contains causes small
changes in the magnetic !eld,” Sokol-Hessner explained. “The scanner can
pick up on that and tell us where the blood is #owing. We get a picture of
which parts of the brain are being used.”

I put on earplugs and lay back on the gurney. Sokol-Hessner and two lab

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assistants placed some foam around my ears and lowered a plastic grille over my
face. In one of my hands they placed a metal console with two buttons on it. I
felt my head and shoulders sliding into a long, cylindrical hole about a foot and
a half wide. “Take a few deep breaths,” Sokol-Hessner said. There was a
crashing noise—the sound of the magnet warming up. Struggling to fend off
claustrophobia, I closed my eyes and counted to a hundred while the scanner
took a picture. “How are you doing?” asked Sokol-Hessner, who had retreated
to the control room. “Fine,” I lied.

My task was to consider a series of investment options that were presented on a

small illuminated screen over my head. In each case, one of the options would
be a !fty-!fty bet and the other would be a sure thing. The !rst scenario
appeared on the screen: a possible gain of four dollars and a possible loss of two
dollars versus a sure thing of zero, meaning that I wouldn’t win or lose
anything. I had three seconds to make my selection. Two dollars didn’t seem
like a lot to lose, so I pressed a button on the console to accept the bet.
Somewhere in the next room, a random number generator was deciding
whether I had won or lost. Then this message #ashed on the screen: “You won
$4.00.”

S okol-Hessner’s thesis advisers are Elizabeth Phelps, a professor of

psychology and neural science at N.Y.U., and Colin Camerer, an economist
at Caltech who helped found neuroeconomics. This spring, I visited Camerer
at his office in Pasadena, California. He is a stocky man of forty-six, with a
large, bald head and blue eyes. His office was cluttered with textbooks and
academic journals, and on one wall there was a whiteboard covered with
equations. It looked like every other economist’s office I’ve visited, except that
on Camerer’s desk there was a plastic model of the human brain.

While we were speaking, Camerer picked up the model and gave me a quick

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tour, starting at the front, with the prefrontal cortex, a structure that helps us
perform complicated mental tasks, such as logical reasoning and planning.
Then he pointed to the parietal cortex and the temporal lobes, regions that are
also involved in deliberative decision-making. All these areas are much larger in
humans than in other animals; scientists think that they were the last parts of
the brain to evolve.

The model was made of layers of interlocking pieces. Camerer removed a piece
from the top layer, exposing the so-called limbic areas beneath, including the
insular cortex and the striatum. These structures date to the earliest period of
human evolution, and neuroscientists believe that they help us process
emotions. Camerer was particularly eager to show me the amygdala, a pair of
almond-shaped structures that also play a role in the processing of emotions.
“They are in here somewhere,” he said, removing more pieces from the model.

Camerer was a child prodigy. He grew up in Baltimore and entered college at

Johns Hopkins at the age of fourteen, majoring in mathematics. He spent a lot
of time at a local racetrack, betting on horses, a hobby that got him interested
in risk-taking and decision-making. In 1981, when he was twenty-one, he
obtained a Ph.D. in economics at the University of Chicago Graduate School
of Business. Camerer also found inspiration outside his !eld.

In 1979, two Israeli psychologists, Daniel Kahneman and Amos Tversky,

published a paper in the economics journal Econometrica, describing the
concept of loss aversion. At the time, few economists and psychologists talked
to one another. In the nineteenth century, their !elds had been considered
closely related branches of the “moral sciences.” But psychology evolved into an
empirical discipline, grounded in close observation of human behavior, while
economics became increasingly theoretical—in some ways it resembled a
branch of mathematics. Many economists regarded psychology with suspicion,
but their preference for abstract models of human behavior came at a cost.

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In order to depict economic decisions mathematically, economists needed to

assume that human behavior is both rational and predictable. They imagined a
representative human, Homo economicus, endowed with consistent preferences,
stable moods, and an enviable ability to make only rational decisions. This
sleight of hand yielded some theories that had genuine predictive value, but
economists were obliged to exclude from their analyses many phenomena that
didn’t !t the rational-actor framework, such as stock-market bubbles, drug
addiction, and compulsive shopping. Economists continue to study Homo
economicus, but many recognize his limitations. Over the past twenty-!ve years,
using methods and insights borrowed from psychology, they have devised a new
approach to studying decision-making: behavioral economics.

One of Camerer’s mentors, Richard Thaler, was among the !rst economists to
cite Kahneman and Tversky’s work; beginning in 1987, he published a series of
in#uential articles describing various types of apparently irrational behavior,
including loss aversion.

Acknowledging that people don’t always behave rationally was an important, if

obvious, !rst step. Explaining why they don’t has proved much harder, and
recently Camerer and other behavioral economists have turned to neuroscience
for help. By the mid-nineteen-nineties, neuroscientists, using MRI machines
and other advanced imaging techniques, had developed a basic understanding
of the roles played by different parts of the brain in the performance of
particular tasks, such as recognizing visual patterns, doing mental
computations, and reacting to threats. In the mid-nineties, Antonio Damasio, a
neurologist at the University of Iowa, and Joseph LeDoux, a neuroscientist at
N.Y.U., each published a book for lay readers describing how the brain
processes emotions. “We were reading the neuroscience, and it just seemed
obvious that there were applications to economics, both in terms of ideas and
methods,” said George Loewenstein, an economist and psychologist at
Carnegie Mellon who read Damasio’s and LeDoux’s books. “The idea that you

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can look inside the brain and see what is happening is just so intensely
exciting.”

In 1997, Loewenstein and Camerer hosted a two-day conference in Pittsburgh,

at which a group of neuroscientists and psychologists gave presentations to
about twenty economists, some of whom were inspired to do imaging studies of
their own. In the past few years, dozens of papers on neuroeconomics have
been published, and the !eld has attracted some of the most talented young
economists, including David Laibson, a forty-year-old Harvard professor who
is an expert in consumer behavior. “Natural science has moved ahead by
studying progressively smaller units,” Laibson told me. “Physicists started out
studying the stars, then they looked at objects, molecules, atoms, subatomic
particles, and so on. My sense is that economics is going to follow the same
path. Forty years ago, it was mainly about large-scale phenomena, like in#ation
and unemployment. More recently, there has been a lot of focus on individual
decision-making. I think the time has now come to go beyond the individual
and look at the inputs to individual decision-making. That is what we do in
neuroeconomics.”

W hen people make investments, they weigh the possible outcomes of

their decisions and select a portfolio of stocks and bonds that offers the
highest possible return at an acceptable level of risk. That is what mainstream
economics says, anyway. In fact, people often have only a vague idea of the risks
they face. Consider my investment in BT. Back in 2002, there was no way that
I could have predicted how much pro!t the company would make in 2006, let
alone in 2010 or 2020. I bought the stock, nonetheless, convinced that it could
only increase in value.

As imaging technology gets more sophisticated and easier to use, it may

become possible to monitor investors’ brains while they trade stocks at their

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offices. For now, however, economists are restricted to laboratory experiments,

in which they pay volunteers to play simple games designed to imitate
situations that people experience in daily life. In one study, Camerer and several
colleagues performed brain scans on a group of volunteers while they placed
bets on whether the next card drawn from a deck would be red or black. In an
initial set of trials, the players were told how many red cards and black cards
were in the deck, so that they could calculate the probability of the next card’s
being a certain color. Then a second set of trials was held, in which the
participants were told only the total number of cards in the deck.

The !rst scenario corresponds to the theoretical ideal: investors facing a set of
known risks. The second setup was more like the real world: the players knew
something about what might happen, but not very much. As the researchers
expected, the players’ brains reacted to the two scenarios differently. With less
information to go on, the players exhibited substantially more activity in the
amygdala and in the orbitofrontal cortex, which is believed to modulate activity
in the amygdala. “The brain doesn’t like ambiguous situations,” Camerer said to
me. “When it can’t !gure out what is happening, the amygdala transmits fear to
the orbitofrontal cortex.”

The results of the experiment suggested that when people are confronted with
ambiguity their emotions can overpower their reasoning, leading them to reject
risky propositions. This raises the intriguing possibility that people who are less
fearful than others might make better investors, which is precisely what George
Loewenstein and four other researchers found when they carried out a series of
experiments with a group of patients who had suffered brain damage.

Each of the patients had a lesion in one of three regions of the brain that are
central to the processing of emotions: the amygdala, the orbitofrontal cortex, or
the right insular cortex. The researchers presented the patients with a series of
!fty-!fty gambles, in which they stood to win a dollar-!fty or lose a dollar.

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This is the type of gamble that people often reject, owing to loss aversion, but
the patients with lesions accepted the bets more than eighty per cent of the
time, and they ended up making signi!cantly more money than a control group
made up of people who had no brain damage. “Clearly, having frontal damage
undermines the over-all quality of decision-making,” Loewenstein, Camerer,
and Drazen Prelec, a psychologist at M.I.T.’s Sloan School of Management,
wrote in the March, 2005, issue of the Journal of Economic Literature. “But there
are situations in which frontal damage can result in superior decisions.”

N ot long ago, I drove to Princeton University to speak to Jonathan Cohen,

a !fty-year-old neuroscientist who is the director of Princeton’s Center
for the Study of Brain, Mind, and Behavior. Nine years earlier, while he was
teaching at Carnegie Mellon, Cohen attended the conference that Camerer and
Loewenstein organized. “I had never taken any economics courses; I had no
idea what they did,” he recalled. “I thought it was all about setting interest
rates.”

Since then, Cohen has collaborated with economists on several imaging

studies. “The key idea in neuroeconomics is that there are multiple systems
within the brain,” Cohen said. “Most of the time, these systems coöperate in
decision-making, but under some circumstances they compete with one
another.”

A good way to illustrate Cohen’s point is to imagine that you and a stranger are
sitting on a park bench, when an economist approaches and offers both of you
ten dollars. He asks the stranger to suggest how the ten dollars should be
divided, and he gives you the right to approve or reject the division. If you
accept the stranger’s proposal, the money will be divided between you
accordingly; if you refuse it, neither of you gets anything.

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How would you react to this situation, which economists refer to as an

“ultimatum game,” because one player effectively gives the other an ultimatum?
Game theorists say that you should accept any positive offer you receive, even
one as low as a dollar, or you will end up with nothing. But most people reject
offers of less than three dollars, and some turn down anything less than !ve
dollars.

Cohen and several colleagues organized a series of ultimatum games in which

half the players—the respondents—were put in MRI machines. At the
beginning of a round, each respondent was shown a photograph of another
player, who would make the respondent an offer. The offer then appeared on a
screen inside the MRI machine, and the respondent had twelve seconds in
which to accept or reject it. The results were the same as in other, similar
experiments—low offers were usually vetoed—but the respondents’ brain scans
were revealing.

When respondents received stingy offers—two dollars for them, say, and eight
dollars for the other player—they exhibited substantially more activity in the
dorsolateral prefrontal cortex, an area associated with reasoning, and in the
bilateral anterior insula, part of the limbic region that is active when people are
angry or in distress. The more activity there was in the limbic structure, the
more likely the person was to reject the offer. To the researchers, it looked as
though the two regions of the brain might be competing to decide what to do,
with the prefrontal cortex wanting to accept the offer and the insula wanting to
reject it. “These !ndings suggest that when participants reject an unfair offer, it
is not the result of a deliberative thought process,” Cohen wrote in a recent
article. “Rather, it appears to be the product of a strong (seemingly negative)
emotional response.”

Several explanations have been proposed for people’s visceral reaction to unfair
offers. Maybe human beings have an intrinsic preference for fairness, and we

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get angry when that preference is violated—so angry that we punish the other
player even at a cost to ourselves. Or perhaps people reject low offers because
they don’t want to appear weak. “We evolved in small communities, where
there was a lot of repeated interaction with the same people,” Cohen said. “In
such an environment, it makes sense to build up a reputation for toughness,
because people will treat you better next time they see you.”

Unfortunately, some of the emotional responses that we developed millennia

ago no longer serve us well. As Cohen put it, “Does it make sense to play tough
with a person you meet on a street in L.A.? No. For one thing, you will
probably never see that person again. For another, he may pull out a gun and
shoot you.” Obviously, we can’t alter our brain structures, but it may be possible
to in#uence decision-making by tinkering with brain chemistry. Last year, a
group of economists led by Ernst Fehr, of the University of Zurich,
demonstrated how this might be done, in an experiment involving what
economists call “the trust game.”

Trust plays a key role in many economic transactions, from buying a

secondhand car to choosing a college. In the simplest version of the trust game,
one player gives some money to another player, who invests it on his behalf and
then decides how much to return to him and how much to keep. The more the
!rst player invests, the more he stands to gain, but the more he has to trust the
second player. If the players trust each other, both will do well. If they don’t,
neither will end up with much money.

Fehr and his collaborators divided a group of student volunteers into two
groups. The members of one group were each given six puffs of the nasal spray
Syntocinon, which contains oxytocin, a hormone that the brain produces
during breast-feeding, sexual intercourse, and other intimate types of social
bonding. The members of the other group were given a placebo spray.

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Scientists believe that oxytocin is connected to stress reduction, enhanced

sociability, and, possibly, falling in love. The researchers hypothesized that
oxytocin would make people more trusting, and their results appear to support
this claim. Of the twenty-nine students who were given oxytocin, thirteen
invested the maximum money allowed, compared with just six out of twenty-
nine in the control group. “That’s a pretty remarkable !nding,” Camerer told
me. “If you asked most economists how they would produce more trust in a
game, they would say change the payoffs or get the participants to play the
game repeatedly: those are the standard tools. If you said, ‘Try spraying
oxytocin in the nostrils,’ they would say, ‘I don’t know what you’re talking
about.’ You’re tricking the brain, and it seems to work.”

E conomics has always been concerned with social policy. Adam Smith
published “The Wealth of Nations,” in 1776, to counter what he viewed
as the dangerous spread of mercantilism; John Maynard Keynes wrote “The
General Theory of Employment, Interest, and Money” (1936) in part to
provide intellectual support for increased government spending during
recessions; Milton Friedman’s “Capitalism and Freedom,” which appeared in
1962, was a free-market manifesto. Today, most economists agree that, left
alone, people will act in their own best interest, and that the market will
coördinate their actions to produce outcomes bene!cial to all.

Neuroeconomics potentially challenges both parts of this argument. If

emotional responses often trump reason, there can be no presumption that
people act in their own best interest. And if markets re#ect the decisions that
people make when their limbic structures are particularly active, there is little
reason to suppose that market outcomes can’t be improved upon.

Consider saving for retirement. Surveys show that up to half of all families end
their working lives with almost no !nancial assets, other than their entitlement

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to Social Security bene!ts. Saving money is difficult, because it involves giving

up things that we value now—a new car, a vacation, fancy dinners—in order to
secure our welfare in the future. All too often, the desire for immediate
grati!cation prevails. “We humans are very committed to our long-term goals,
such as eating healthy food and saving for retirement, and yet, in the moment,
temptations arise that often trip up our long-term plans,” David Laibson, the
Harvard economist, said. “I was planning to give up smoking, but I couldn’t
resist another cigarette. I was planning to be faithful to my wife, but I found
myself in an adulterous relationship. I was planning to save for retirement, but I
spent all my earnings. Understanding this tendency stands at the heart of a lot
of big policy debates.”

Laibson has collaborated with Loewenstein, Cohen, and Samuel McClure,

another Princeton psychologist, to examine what happens in people’s brains
when they are forced to choose between immediate and delayed rewards. For a
study the four researchers published in Science, in 2004, they used an MRI
machine to scan a group of student volunteers who were asked to choose
between receiving a !fteen-dollar Amazon.com gift voucher today and
receiving a twenty-dollar Amazon.com gift voucher in two weeks or a month.

The scans showed that both gift options triggered activity in the lateral
prefrontal cortex, but that the immediate option also caused disproportionate
activity in the limbic areas. Moreover, the greater the activity in the limbic areas
the more likely the students were to choose the voucher that was immediately
available and less valuable.

The results provide further evidence that reason and emotion often compete
inside the brain, and it also helps explain a number of puzzling phenomena,
such as the popularity of Christmas savings accounts, which people contribute
to throughout the year. “Why would anybody put money into a savings account
that offers zero interest and imposes a penalty if you withdraw cash early?”

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Cohen said. “It simply doesn’t make sense in terms of a traditional, rational
economic model. The reason is that there is this limbic system that produces a
strong drive. When it sees something it likes, it wants it now. So you need
some type of pre-commitment device to make people save.”

Laibson and Brigitte Madrian, an economist at the Wharton School, have

studied one such “pre-commitment device” for 401(k) plans, which deduct part
of an employee’s earnings each month and invest them in stocks and bonds.
Because the plans are often optional, many people fail to join them, even when
their employers offer to match a portion of their contributions. Laibson and his
colleagues have called for people to be automatically included in the plans
unless they choose to opt out. At companies that have adopted such a policy,
enrollment rates have increased sharply.

Reforming 401(k) plans is an example of “asymmetric paternalism,” a new

political philosophy based on the idea of saving people from the vagaries of
their limbic regions. Warning labels on tobacco and potentially harmful foods
are similarly intended to keep subcortical structures in check. Neuroeconomists
have suggested additional policies, including warning buyers of lottery tickets
that their chances of winning are practically nonexistent and imposing
mandatory “cooling off ” periods before people make big-ticket purchases, such
as cars and boats. “Asymmetric paternalism helps those whose rationality is
bounded from making a costly mistake and harms more rational folks very
little,” Camerer, Loewenstein, and three colleagues wrote in a 2003 issue of the
University of Pennsylvania Law Review. “Such policies should appeal to
everyone across the political spectrum.”

S ome neuroeconomic “!ndings” aren’t exactly discoveries, of course. In the

fourth century B.C., Plato described reason as a charioteer attempting to
steer the twin horses of passion and spirit. More recently, Freud wrote about
the contest between the ego and the id. “What is new,” Jonathan Cohen wrote

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in the fall, 2005, issue of the Journal of Economic Perspectives, “is that researchers
now have the tools to begin to identify and characterize these systems at the
level of their physical implementation in the human brain. Neuroscience gives
detailed access to the mechanisms that underlie behavior and thus may allow
scientists to answer questions that cannot be answered easily, or at all, by
observing behavior alone.”

Many traditional economists are unimpressed by this argument. In a recent

paper, “The Case for Mindless Economics,” Faruk Gul and Wolfgang
Pesendorfer, two Princeton economists, wrote, “Neuroscience evidence cannot
refute economic models because the latter make no assumptions and draw no
conclusions about the physiology of the brain.” Gul and Pesendorfer have a
point: neuroeconomics doesn’t tell us whether the neo-Keynesian or the
neoclassical model of in#ation is correct. But it can provide indirect evidence to
reinforce certain theories and discredit others. About ten years ago, David
Laibson published a paper on “hyperbolic discounting,” which suggested that
people treat immediate rewards differently from the way they treat delayed
rewards, preferring the former in a manner that simple rational-choice models
can’t explain. Now the results of the Amazon voucher experiment have
provided a possible explanation for the behavior that Laibson identi!ed:
immediate and delayed rewards stimulate different parts of the brain. “The
practical implications of the experiment come from obtaining a better
understanding of the human taste for instant grati!cation,” Laibson said. “If we
can understand that, we will be in a much better position to design policies that
mitigate what can be self-defeating behavior.”

The biggest challenge facing neuroeconomics comes not from its opponents in
the economics profession but from its supposed allies in neuroscience. Many
neuroscientists now consider MRI data to be uninformative. Neural activity
occurs in milliseconds, on a scale of perhaps 0.1 millimetres. A typical MRI

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machine, which measures neural !ring indirectly, by tracking blood #ow, takes a
picture every couple of seconds and isn’t able to detect anything less than three
millimetres long. Because of these limitations, neuroscientists prefer to track
the !ring of single neurons by inserting tiny electrodes into the brain.
Unfortunately, this is an invasive procedure, and its experimental use has
generally been restricted to laboratory animals.

There is also a more fundamental objection to neuroeconomics and the

Platonic view of decision-making. “There is no evidence that hidden inside the
brain are two fully independent systems, one rational and one irrational,” Paul
W. Glimcher, a neuroscientist who is the director of N.Y.U.’s Center for
Neuroeconomics, and two of his colleagues, Michael C. Dorris and Hannah
M. Bayer, wrote in a recent paper. “There is, for example, no evidence that
there is an emotional system, per se, and a rational system, per se, for decision
making at the neurobiological level.”

In place of the reason-versus-passion model, Glimcher and his colleagues have

adopted a view of decision-making that, paradoxically, bears a striking
resemblance to orthodox economics. In one experiment, Glimcher and a
colleague trained thirsty monkeys to direct their eyes to one of two illuminated
targets, which earned them differing chances of getting juice rewards—a !fty-
per-cent chance of getting a full cup of juice for looking right, say, versus a
seventy-per-cent chance of getting half a cup of juice for looking left. The
game was repeated many times, with the probabilities changing periodically.

The monkeys’ task was to consume as much juice as possible, and they proved
very adept at it. Before long, they were dividing their time between the
illuminated targets in a way that roughly maximized their payoffs. When the
odds favored looking right, they looked right; when the odds favored looking
left, they looked left. Glimcher also used electrodes to track neural !ring in part
of the posterior parietal cortex, an area that is thought to organize signals

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transmitted by the retina. He discovered that the !ring rate was closely related
to the rewards the monkeys were likely to receive. “Speci!cally,” he and his
colleagues reported, “the !ring rate of a neuron associated with a leftward
movement was a linear function of the probability that the leftward movement
would yield the juice reward.”

Clearly, monkeys can’t do probability sums. (Many humans struggle with

them!) But Glimcher’s experiment implies that their brains act as if they were
solving a mathematical problem, which is what economists assume when they
depict people as rational agents trying to maximize their well-being, or “utility.”
“What seems to be emerging from these early studies is a remarkably economic
view of the primate brain,” Glimcher and his colleagues wrote. “The !nal
stages of decision-making seem to re#ect something very much like a utility
calculation.”

If Glimcher’s results could be demonstrated in human brains, they might

undermine a lot of neuroeconomics, and many in the !eld tend to downplay his
work. “Well, monkeys are very interesting, but they are not nearly as rich in
their behavior as humans,” George Loewenstein said to me. “Humans have this
very well-developed prefrontal cortex, which allows us to look ahead a number
of stages, rather than just behaving in a re#exive fashion. Still, it’s wonderful
that we have these controversies. Most of us are friends, and we debate these
issues. I’ve learned a lot from talking to Paul.”

I was inside the MRI machine for nearly two hours, and I answered more
than two hundred and !fty questions, which were organized into two blocks.
Sokol-Hessner had instructed me to answer the !rst set as if each investment
were the only one I would make. He told me to treat the second set of gambles
as a group, as if I were constructing an investment portfolio. Later, he explained
that he wanted to compare my answers to the two blocks of questions. Many
people become less loss-averse when they are constructing a portfolio of

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investments, presumably because they believe that losses in one part of their
portfolio will be made up for by gains in others. “Our research has shown that
people can alter their own choice behavior in a systematic fashion,” Sokol-
Hessner said. “They can make themselves less loss-averse. If loss aversion is
mediated by the limbic structures, such as the amygdala, we would expect a big
decrease in activity in those areas when you become less loss-averse.”

The goal of the imaging experiment was to test this hypothesis. I was only the
second person to take part in the experiment, but Sokol-Hessner told me that I
was an atypical case. Rather than altering my strategy, I answered all the
questions in the same way. Whenever the risk-free option was worth more than
about !ve dollars, I accepted it, thinking that I would have been foolish to turn
down a sure thing. Occasionally, when the risk-free option was zero, or close to
zero, I gambled on the risky option. I’m not sure why I acted in this way—it
wasn’t strictly logical—but it made answering the questions easy, and it seemed
to pay off: by the end of the experiment, I had won sixty-eight dollars.

My experience illustrated some of the drawbacks of brain scanning. After about

an hour inside the machine, I was more concerned about getting out than I was
about making a few dollars. (Sokol-Hessner said that I moved my head around
so much that my brain scans were unusable.) “That’s the terrible thing about
MRIs,” Sokol-Hessner conceded. “You are in a long tube, and you might well
feel tired or claustrophobic. There’s de!nitely other stuff going on in there
besides the experiment. We have to be very careful about how we interpret the
evidence.”

Economists who have staked their careers on neuroeconomics are mindful of

this advice. “It isn’t a wholesale rejection of the traditional methodology,” David
Laibson said of his !eld. “It is just a recognition that decision-making is not
always perfect. People try to do the best they can, but they sometimes make

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mistakes. The idea that a single mechanism maximizes welfare and always gets
things right—that concept is on the rocks. But models that I call ‘cousins’ of
the rational-actor model will survive.”

The modi!ed theories to which Laibson referred assume that people have two
warring sides: the !rst deliberative and forward-looking, the second impulsive
and myopic. Under certain circumstances, the impulsive side prevails, and
people succumb to things like drug addiction, overeating, and taking wild
gambles in the stock market. For now, the new models await empirical
veri!cation, but neuroeconomists are convinced that they’re onto something.
“We are not going to falsify all of traditional economics,” Colin Camerer said.
“But we are going to point to a whole range of biological variables that
traditionally have not been included in the analysis. In economics, that is a big
change.” ♦

Published in the print edition of the September 18, 2006, issue.

John Cassidy has been a staff writer at The New Yorker since 1995. He also writes a
column about politics, economics, and more for newyorker.com.

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