Neuroeconomics: How Neuroscience Can Inform Economics

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Journal of Economic Literature Vol. XLIII (March 2005), pp. 9–64

∗ COLIN CAMERER, GEORGE LOEWENSTEIN, and DRAZEN PRELEC

Who knows what I want to do? Who knows what anyone wants to do? How can you be sure about something like that? Isn’t it all a question of brain chemistry, signals going back and forth, electrical energy in the cortex? How do you know whether something is really what you want to do or just some kind of nerve impulse in the brain. Some minor little activity takes place somewhere in this unimportant place in one of the brain hemispheres and suddenly I want to go to Montana or I don’t want to go to Montana. (White Noise, Don DeLillo)

1. Introduction such as finance, game theory, labor economics, public finance, law, and macroeconomics In the last two decades, following almost a (see Colin Camerer and George Loewenstein century of separation, economics has begun 2004). Behavioral economics has mostly been to import insights from psychology. informed by a branch of psychology called “Behavioral economics” is now a prominent “behavioral decision research,” but other fixture on the intellectual landscape and has cognitive sciences are ripe for harvest. Some spawned applications to topics in economics, important insights will surely come from neuroscience, either directly or because neuro- ∗ Camerer: California Institute of Technology. science will reshape what is believed about Loewenstein: Carnegie Mellon University. Prelec: psychology which in turn informs economics. Massachusetts Institute of Technology. We thank partici- Neuroscience uses imaging of brain activity pants at the Russell Sage Foundation-sponsored conference on Neurobehavioral Economics (May 1997) at and other techniques to infer details about Carnegie Mellon, the Princeton workshop on Neural how the brain works. The brain is the ultimate Economics December 8–9, 2000, and the Arizona confer- “black box.” The foundations of economic ence in March 2001. This research was supported by NSF grant SBR-9601236 and by the Center for Advanced Study theory were constructed assuming that details in Behavioral Sciences, where the authors visited during about the functioning of the brain’s black box 1997–98. David Laibson’s presentations have been partic- would not be known. This pessimism was ularly helpful, as were comments and suggestions from the editor and referees, and conversations and comments from expressed by William Jevons in 1871: Ralph Adolphs, John Allman, Warren Bickel, Greg Berns, Meghana Bhatt, Jonathan Cohen, Angus Deaton, John Dickhaut, Paul Glimcher, Dave Grether, Ming Hsu, David I hesitate to say that men will ever have the means Laibson, Danica Mijovic-Prelec, Read Montague, Charlie of measuring directly the feelings of the human Plott, Matthew Rabin, Antonio Rangel, Peter Shizgal, heart. It is from the quantitative effects of the Steve Quartz, and Paul Zak. Albert Bollard, Esther feelings that we must estimate their comparative Hwang, and Karen Kerbs provided editorial assistance. amounts.

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Since feelings were meant to predict behav- drug consumption limits pleasure from ior but could only be assessed from behavior, future consumption of other goods (dynam- economists realized that, without direct ic cross-partial effects in utility for commod- measurement, feelings were useless inter- ity bundles) and how environmental cues vening constructs. In the 1940s, the con- trigger unpleasant craving and increase cepts of ordinal utility and revealed demand. These effects can be approximated preference eliminated the superfluous inter- by extending standard theory and then mediate step of positing immeasurable feel- applying conventional tools (see Douglas ings. Revealed preference theory simply Bernheim and Antonio Rangel 2004; David equates unobserved preferences with Laibson 2001; Ted O’Donoghue and observed choices. Circularity is avoided by Matthew Rabin 1997). assuming that people behave consistently, The radical approach involves turning which makes the theory falsifiable; once back the hands of time and asking how eco- they have revealed that they prefer A to B, nomics might have evolved differently if it people should not subsequently choose B had been informed from the start by insights over A. Later extensions—discounted, and findings now available from neuro- expected, and subjective expected utility, science. Neuroscience, we will argue, points and Bayesian updating—provided similar to an entirely new set of constructs to under- “as if” tools which sidestepped psychological lie economic decision making. The standard detail. The “as if” approach made good economic theory of constrained utility maxi- sense as long as the brain remained substan- mization is most naturally interpreted either tially a black box. The development of eco- as the result of learning based on consump- nomics could not be held hostage to tion experiences (which is of little help when progress in other human sciences. prices, income, and opportunity sets But now neuroscience has proved change), or careful deliberation—a balanc- Jevons’s pessimistic prediction wrong; the ing of the costs and benefits of different study of the brain and nervous system is options—as might characterize complex beginning to allow direct measurement of decisions like planning for retirement, buy- thoughts and feelings. These measurements ing a house, or hammering out a contract. are, in turn, challenging our understanding Although economists may privately acknowl- of the relation between mind and action, edge that actual flesh-and-blood human leading to new theoretical constructs and beings often choose without much delibera- calling old ones into question. How can the tion, the economic models as written invari- new findings of neuroscience, and the theo- ably represent decisions in a “deliberative ries they have spawned, inform an econom- equilibrium,” i.e., that are at a stage where ic theory that developed so impressively in further deliberation, computation, reflec- their absence? tion, etc. would not by itself alter the agent’s In thinking about the ways that neuro- choice. The variables that enter into the for- science can inform economics, it is useful to mulation of the decision problem—the pref- distinguish two types of contributions, which erences, information, and constraints—are we term incremental and radical approach- precisely the variables that should affect the es. In the incremental approach, neuro- decision, if the person had unlimited time science adds variables to conventional and computing ability. accounts of decision making or suggests spe- While not denying that deliberation is part cific functional forms to replace “as if” of human decision making, neuroscience assumptions that have never been well sup- points out two generic inadequacies of this ported empirically. For example, research on approach—its inability to handle the crucial the neurobiology of addiction suggests how roles of automatic and emotional processing. mr05_Article 1 3/28/05 3:25 PM Page 11

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First, much of the brain implements role in economics and other social sciences “automatic” processes, which are faster than (e.g., law, Terrence Chorvat, Kevin McCabe, conscious deliberations and which occur and Vernon Smith 2004). Indeed, a new area with little or no awareness or feeling of effort of economics that has been branded “neu- (John Bargh et al. 1996; Bargh and Tanya roeconomics” has already formed the basis Chartrand 1999; Walter Schneider and of numerous academic gatherings that have Richard Shiffrin 1977; Shiffrin and brought neuroscientists and economists Schneider 1977). Because people have little together (see also Paul Zak, in press).1 or no introspective access to these processes, Participating in the development of a shared or volitional control over them, and these intellectual enterprise will help us ensure processes were evolved to solve problems of that the neuroscience informs economic evolutionary importance rather than respect questions we care about. Stimulated by the logical dicta, the behavior these processes authors’ own participation in a number of generate need not follow normative axioms such meetings, our goal in this paper is to of inference and choice. describe what neuroscientists do and how Second, our behavior is strongly influ- their discoveries and views of human behav- enced by finely tuned affective (emotion) ior might inform economic analysis. In the systems whose basic design is common to next section (2), we describe the diversity of humans and many animals (Joseph LeDoux tools that neuroscientists use. Section 3 1996; Jaak Panksepp 1998; Edmund Rolls introduces a simplified account of how cog- 1999). These systems are essential for daily nition and affect on the one hand, and auto- functioning, and when they are damaged or matic and controlled processes on the other, perturbed, by brain injury, stress, imbal- work separately, and interact. Section 4 dis- ances in neurotransmitters, or the “heat of cusses general implications for economics. the moment,” the logical-deliberative sys- Section 5 goes into greater detail about tem—even if completely intact—cannot implications of neuroeconomics for four top- regulate behavior appropriately. ics in economics: intertemporal choice, deci- Human behavior thus requires a fluid sion making under risk, game theory, and interaction between controlled and automat- labor-market discrimination. Through most ic processes, and between cognitive and of the paper, our focus is largely on how neu- affective systems. However, many behaviors roscience can inform models of microfoun- that emerge from this interplay are routine- dations of individual decision making. ly and falsely interpreted as being the prod- Section 6 discusses some broader macro uct of cognitive deliberation alone (George implications and concludes. Wolford, Michael Miller, and Michael Gazzaniga 2000). These results (some of 2. Neuroscience Methods which are described below) suggest that Scientific technologies are not just tools introspective accounts of the basis for choice scientists use to explore areas of interest. should be taken with a grain of salt. Because New tools also define new scientific fields automatic processes are designed to keep and erase old boundaries. The telescope cre- behavior “off-line” and below consciousness, ated astronomy by elevating the science from we have far more introspective access to controlled than to automatic processes. 1 The first meeting was held at Carnegie Mellon in Since we see only the top of the automatic 1997. Later meetings were held in Arizona and iceberg, we naturally tend to exaggerate the Princeton, in 2001, in Minnesota in 2002, and on importance of control. Martha’s Vineyard in 2003 and Kiawah Island in 2004. Occasional sessions devoted to this rapidly growing topic Neuroscience findings and methods will are now common at large annual meetings in both undoubtedly play an increasingly prominent economics and neuroscience. mr05_Article 1 3/28/05 3:25 PM Page 12

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pure cosmological speculation. The micro- resolution (on the order of one millisecond) scope made possible similar advances in biol- and is the only method used with humans ogy. The same is true of economics. Its that directly monitors neural activity, as boundaries have been constantly reshaped by opposed to, e.g., blood flow. But spatial reso- tools such as mathematical, econometric, and lution is poor and it can only measure activi- simulation methods. Likewise, the current ty in the outer part of the brain. EEG surge of interest in neuroscience by psychol- resolution has, however, been improving ogists emerged largely from new methods, through the use of ever-increasing numbers and the methods may productively blur the of electrodes. Interpolation methods, and the boundaries of economics and psychology. combined use of EEG and fMRI for measur- This section reviews some of these methods. ing outer-brain signals and inner-brain signals at the same time, promise to create 2.1 Brain Imaging statistical methods which make reasonable Brain imaging is currently the most popu- inferences about activity throughout the lar neuroscientific tool. Most brain imaging brain from EEG signals. For economics, a involves a comparison of people performing major advantage of EEG is its relative unob- different tasks—an “experimental” task and trusiveness and portability. Portability will a “control” task. The difference between eventually reach the point where it will be images taken while subject is performing the possible to take unobtrusive measurements two tasks provides a picture of regions of the from people as they go about their daily brain that are differentially activated by the affairs. PET and fMRI provide better spatial experimental task. resolution than EEG, but poorer temporal There are three basic imaging methods. resolution because blood-flow to neurally The oldest, electro-encephalogram (or EEG) active areas occurs with a stochastic lag from uses electrodes attached to the scalp to meas- a few seconds (fMRI) to a minute (PET). ure electrical activity synchronized to stimu- Brain imaging still provides only a crude lus events or behavioral responses (known as snapshot of brain activity. Neural processes Event Related Potentials or ERPs). Like are thought to occur on a 0.1 millimeter EEG, positron emission topography (PET) scale in 100 milliseconds (msec), but the scanning is an old technique in the rapidly spatial and temporal resolution of a typical changing time-frame of neuroscience, but is scanner is only 3 millimeters and several sec- still a useful technique. PET measures blood onds. Multiple trials per subject can be aver- flow in the brain, which is a reasonable proxy aged to form composite images, but doing so for neural activity, since neural activity in a constrains experimental design. However, region leads to increased blood flow to that the technology has improved rapidly and will region. The newest, and currently most pop- continue to improve. Hybrid techniques that ular, imaging method is functional magnetic combine the strengths of different methods resonance imaging (fMRI), which tracks are particularly promising. Techniques for blood flow in the brain using changes in mag- simultaneously scanning multiple brains netic properties due to blood oxygenation (“hyperscanning”) have also been developed, (the “BOLD signal”). Simultaneous direct which can be used to study multiple-brain- recording of neural processing and fMRI level differences in activity in games and responses confirms that the BOLD signal markets (Read Montague et al. 2002). reflects input to neurons and their processing 2.2 Single-Neuron Measurement (Nikos Logothetis et al. 2001). Although fMRI is increasingly becoming Even the finest-grained brain imaging the method of choice, each method has techniques only measure activity of “cir- pros and cons. EEG has excellent temporal cuits” consisting of thousands of neurons. In mr05_Article 1 3/28/05 3:25 PM Page 13

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single neuron measurement, tiny electrodes For a big series of EBS pulses, rats will leap are inserted into the brain, each measuring a over hurdles, cross electrified grids, and single neuron’s firing. As we discuss below, forego their only daily opportunities to eat, single neuron measurement studies have drink, or mate. Animals also trade EBS off produced some striking findings that, we against smaller rewards in a sensible fash- believe, are relevant to economics. A limita- ion—e.g., they demand more EBS to forego tion of single neuron measurement is that, food when they are hungry. Unlike more because insertion of the wires damages naturalistic rewards, EBS does not satiate. neurons, it is largely restricted to animals. And electrical brain stimulation at specific Studying animals is informative about sites often elicits behaviors such as eating, humans because many brain structures and drinking (Joseph Mendelson 1967), or copu- functions of non-human mammals are simi- lation (Anthony Caggiula and Bartley lar to those of humans (e.g., we are more Hoebel 1966). Many abused drugs, such as genetically similar to many species of mon- cocaine, amphetamine, heroin, cannabis, keys than those species are to other species). and nicotine, lower the threshold at which Neuroscientists commonly divide the brain animals will lever-press for EBS (Roy Wise into crude regions that reflect a combination 1996). Despite its obvious applications to of evolutionary development, functions, and economics, only a few studies have explored physiology. The most common, triune divi- substitutability of EBS and other reinforcers sion draws a distinction between the “reptil- (Steven Hursh and B. H. Natelson; Leonard ian brain,” which is responsible for basic Green and Howard Rachlin 1991; Peter survival functions, such as breathing, sleep- Shizgal 1999). ing, eating, the “mammalian brain,” which 2.4 Psychopathology and Brain Damage in encompasses neural units associated with Humans social emotions, and the “hominid” brain, which is unique to humans and includes Chronic mental illnesses (e.g., schizophre- much of our oversized cortex—the thin, fold- nia), developmental disorders (e.g., autism), ed, layer covering the brain that is responsi- degenerative diseases of the nervous system, ble for such “higher” functions as language, and accidents and strokes that damage local- consciousness and long-term planning (Paul ized brain regions help us understand how MacLean 1990). Because single neuron the brain works (e.g., Antonio Damasio measurement is largely restricted to nonhu- 1994). When patients with known damage to man animals, it has so far shed far more light an area X perform a special task more poor- on the basic emotional and motivational ly than “normal” patients, and do other tasks processes that humans share with other equally well, one can infer that area X is used mammals than on higher-level processes to do the special task. Patients who have such as language and consciousness. undergone neurosurgical procedures such as lobotomy (used in the past to treat depres- 2.3 Electrical Brain Stimulation (EBS) sion) or radical bisection of the brain (an Electrical brain stimulation is another extreme remedy for epilepsy, now rarely method that is largely restricted to animals. used) have also provided valuable data (see In 1954, two psychologists (James Olds and Walter Freeman and James Watts 1942; Peter Milner 1954) discovered that rats Gazzaniga and LeDoux 1978). would learn and execute novel behaviors if Finally, a relatively new method called rewarded by brief pulses of electrical brain transcranial magnetic stimulation (TMS) stimulation (EBS) to certain sites in the uses pulsed magnetic fields to temporarily brain. Rats (and many other vertebrates, disrupt brain function in specific regions. including humans) will work hard for EBS. The difference in cognitive and behavioral mr05_Article 1 3/28/05 3:25 PM Page 14

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functioning that results from such disrup- the trajectories which project from one neu- tions provides clues about which regions ral region to others (like watching patterns control which neural functions. The theoret- of car traffic from a helicopter can tell you ical advantage of TMS over brain imaging is roughly the ebb and flow of economic and that TMS directly leads to causal inferences social activity). Knowing where a region’s about brain functioning rather than the neurons project is extremely useful in purely associational evidence provided by understanding neural circuitry and is an imaging techniques. Unfortunately, the use important complement to simply imaging of TMS is currently limited to the cortex (it activity in multiple regions (using fMRI) is particularly useful for studying visual with little ability to pin down which activity processes in the occipital lobe, in the back of occurs earliest. Furthermore, the technique the head). It is also controversial because it can be used after autopsies, which is an can cause seizures and may have other bad obvious advantage. long-run effects. 2.7 Is Neuroscience Just About Where 2.5 Psychophysical Measurement Things Happen in the Brain? An old and simple technique is measure- Neuroscience is sometimes criticized as ment of psychophysiological indicators like providing little more than a picture of heart rate, blood pressure, galvanic skin “where things happen in the brain” or, more response (GSR, sweating in the palms), and cynically, as simply showing that behavior is pupil dilation (pupils dilate in response to caused by action in the nervous system arousal, including monetary reward). These (which was never in doubt). Indeed, some measurements are easy, not too obtrusive, neuroscientists who are purely interested in portable, and very rapid in time. The draw- the functionality of different brain regions back is that measurements can fluctuate for would endorse such a characterization many reasons (e.g., body movement) and unapologetically. many different combinations of emotions However, the long-run goal of neuro- lead to similar psychophysiological output, science is to provide more than a map of the just as being pulled over by a cop and meet- mind. By tracking what parts of the brain ing a blind date may produce very similar are activated by different tasks, and espe- emotional anxiety responses. Often these cially by looking for overlap between measurements are useful in combination diverse tasks, neuroscientists are gaining an with other techniques or in lesion patients understanding of what different parts of the who are likely to have very different physio- brain do, how the parts interact in “circuit- logical reactions (e.g., sociopaths do not ry,” and, hence, how the brain solves differ- show normal GSR fear reactions before a ent types of problems. For example, possible monetary loss). Facial musculature because different parts of the brain are can also be measured by attaching small more or less associated with affective or electrodes to smiling muscles (on the cognitive processing (a distinction we cheekbones) and frowning muscles (between define more precisely below), imaging peo- the eyebrows). ple while they are doing different types of economic tasks provides important clues 2.6 Diffusion Tensor Imaging (DTI) about the mix of affective and cognitive Diffusion tensor imaging (DTI) is a new processes in those tasks. For example, technique which exploits the fact that water Sanfey et al. (2003) find that the insula cor- flows rapidly though myleinated (sheathed) tex—a region in the temporal lobe that neural axons (Dennis Bihan et al. 2001). encodes bodily sensations like pain and Imaging the water flow can therefore reveal odor disgust—is active when people receive mr05_Article 1 3/28/05 3:25 PM Page 15

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low offers in an ultimatum bargaining humans, provides a level of experimental game. This means that even if rejecting a control that economists conducting field low offer is done because of an adapted research should envy. instinct to build up a reputation for tough- As always, “the proof is in the pudding.” ness (in order to get more in the future), Here, our goal is not to review the many the circuitry that encodes this instinct clear- ways in which neuroscience will rapidly ly has an affective component, which is not change economic theory, because that is not purely cognitive. where we are yet. Our goal is to showcase For neuroeconomists, knowing more some key findings in neuroscience, and stim- about functional specialization, and how ulate the reader’s curiosity about what these regions collaborate in different tasks, could findings might mean for economics. substitute familiar distinctions between categories of economic behavior (sometimes 3. Basic Lessons from Neuroscience established arbitrarily by suggestions which become modeling conventions) with new Because most of these techniques involve ones grounded in neural detail. For exam- localization of brain activity, this can easily ple, the insula activity noted by Sanfey et al. foster a misperception that neuroscience is in bargaining is also present when subjects merely developing a “geography of the playing matrix games are asked to guess brain,” a map of which brain bits do what what other subjects think they will do (sec- part of the job. If that were indeed so, then ond-order beliefs) (see Meghana Bhatt and there would be little reason for economists Camerer, in press). This suggests that maybe to pay attention. In reality, however, neuro- the subjects who receive low offers in the science is beginning to use regional activity ultimatum study are not disgusted, they are differences and other clues to elucidate the simply evaluating a second-order belief principles of brain organization and func- about what proposers expect them to do, as tioning, which in turn, is radically changing an input into an emotional evaluation. This is our understanding of how the brain works. just a speculation, of course, but it shows Our goal in this section is to highlight some how direct understanding of neural circuitry of the findings from neuroscience that may can inspire theorizing and the search for prove relevant to economics. new data. 3.1 A Two-Dimensional Theoretical In light of the long list of methods Framework reviewed earlier in this section, it is also worth emphasizing that neuroscience isn’t Our organizing theme, depicted in Table 1, only about brain imaging. Brain lesion stud- emphasizes the two distinctions mentioned ies (as well as TMS) allow one to examine in the introduction, between controlled and the impact of disabling specific parts of the automatic processes, and between cognition brain. They have often provided clearer evi- and affect. dence on functionality of specific brain 3.1.1 Automatic and Controlled Processes regions—even with tiny sample sizes from rare types of damage—than imaging meth- The distinction between automatic and ods have. Single neuron measurement pro- controlled processes was first proposed by vides information not just about what parts Schneider and Shiffrin (1977). Many others of the brain “light up,” but about the specif- have developed similar two-system models ic conditions that cause specific neurons to since then, with different labels: rule-based fire at accelerated or decelerated rates. And and associative (Steven Sloman 1996); electrical brain stimulation, though it is rational and experiential systems (Lee largely off limits to studies involving Kirkpatrick and Seymour Epstein 1992); mr05_Article 1 3/28/05 3:25 PM Page 16

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TABLE 1 TWO DIMENSIONS OF NEURAL FUNCTIONING

Cognitive Affective Controlled Processes ■ serial ■ effortful ■ evoked deliberately III ■ good introspective access Automatic Processes ■ parallel ■ effortless ■ reflexive III IV ■ no introspective access

reflective and reflexive (Matthew Automatic processes are the opposite of Lieberman et al. 2002); deliberative and controlled processes on each of these implementive systems (Peter Gollwitzer, dimensions— they operate in parallel, are Kentaro Fujita, and Gabriele Oettingen not accessible to consciousness, and are 2004); assessment and locomotion (Arie relatively effortless. Parallelism facilitates Kruglanski et al. 2000), and type I and type rapid response, allows for massive multi- II processes (Daniel Kahneman and Shane tasking, and gives the brain remarkable Frederick 2002). power when it comes to certain types of Controlled processes, as described by the tasks, such as visual identification. two rows of Table 1, are serial (they use Parallelism also provides redundancy that step-by-step logic or computations), tend to decreases the brain’s vulnerability to injury. be invoked deliberately by the agent when When neurons are progressively destroyed her or she encounters a challenge or sur- in a region, the consequences are typically prise (Reid Hastie 1984), and are often gradual rather than sudden (“graceful associated with a subjective feeling of degradation”).3 “Connectionist” neural net- effort. People can typically provide a good work models formulated by cognitive psy- introspective account of controlled process- chologists (David Rumelhart and James es. Thus, if asked how they solved a math McClelland 1986) capture these features problem or choose a new car, they can and have been applied to many domains, often recall the considerations and the 2 steps leading up to the choice. Standard 3 The brain’s ability to recover from environmental tools of economics, such as decision trees damage is also facilitated by a property called plasticity. In and dynamic programming, can be viewed one study that illustrates the power of plasticity, the optic nerves of ferrets (which are born when they are still at a as stylized representations of controlled relatively immature state of development when the brain is processes. still highly plastic) were disconnected at birth and recon- nected to the auditory cortex (the portion of the brain that processes sound). The ferrets learned to “see” using auditory cortex, and some neurons in their auditory cortex 2 Elaborate methods have been developed that maxi- actually took on the physical characteristics of neurons in mize the validity of such “verbal protocols” (see, e.g., the visual cortex (Lauire von Melchner, Sarah Pallas, and Herbert Simon). Mriganka Sur 2000). mr05_Article 1 3/28/05 3:25 PM Page 17

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Somato- sensory

Cognitive control “interrupt Brodmann”10 Visual cortex Automatic affect

L insula R insula

Figure 1. The human brain with some economically relevant areas marked.

including commercial ones. Models of this Automatic and controlled processes can type have a very different structure from be roughly distinguished by where they the systems of equations that economists occur in the brain (Lieberman et al. 2002). typically work with. Unlike systems of Regions that support cognitive automatic equations, they are “black-box”; it is hard to activity are concentrated in the back (occip- intuit what they are doing by looking at ital), top (parietal), and side (temporal) individual parameters. parts of the brain (see Figure 1). The amyg- Because automatic processes are not dala, buried below the cortex, is responsible accessible to consciousness, people often for many important automatic affective have surprisingly little introspective insight responses, especially fear. Controlled into why automatic choices or judgments processes occur mainly in the front (orbital were made. A face is perceived as “attrac- and prefrontal) parts of the brain. The pre- tive” or a verbal remark as “sarcastic” auto- frontal cortex (pFC) is sometimes called the matically and effortlessly. It is only later “executive” region, because it draws inputs that the controlled system may reflect on from almost all other regions, integrates the judgment and attempt to substantiate it them to form near and long-term goals, and logically, and when it does, it often does so plans actions that take these goals into spuriously (e.g., Timothy Wilson, Samuel account (Timothy Shallice and Paul Lindsey, and Tonya Schooler 2000). Burgess 1996). The prefrontal area is the mr05_Article 1 3/28/05 3:25 PM Page 18

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region that has grown the most in the (LeDoux 1996; Piotr Winkielman and Kent course of human evolution and which, Berridge 2004). As Rita Carter (1999) com- therefore, most sharply differentiates us ments, “the conscious appreciation of emo- from our closest primate relatives (Stephen tion is looking more and more like one Manuck et al. 2003). quite small, and sometimes inessential, ele- Automatic processes—whether cognitive ment of a system of survival mechanisms or affective—are the default mode of brain that mainly operate—even in adults—at an operation. They whir along all the time, unconscious level.” even when we dream, constituting most of For most affect researchers, the central the electro-chemical activity in the brain. feature of affect is not the feeling states asso- Controlled processes occur at special ciated with it, but its role in human motiva- moments when automatic processes become tion. All affects have “valence”—they are “interrupted,” which happens when a per- either positive or negative (though some son encounters unexpected events, experi- complex emotions, such as “bittersweet,” ences strong visceral states, or is presented can combine more basic emotions that have with some kind of explicit challenge in the opposing valences). Many also carry “action form of a novel decision or other type of tendencies” (Nico Frijda 1986; Leonard problem. To the degree that controlled Berkowitz 1999)—e.g., anger motivates us to processes are well described by economic aggress, pain to take steps to ease the pain, calculation but parallel processes are not, and fear to escape or in some cases to one could say that economics is about the freeze—as well as diverse other effects on “interrupt” or “override.” 4 sensory perception, memory, preferences, and so on (see, e.g., Leda Cosmides and 3.1.2 Affective and Cognitive Processes John Tooby 2004). Affective processes, The second distinction, represented by according to Zajonc’s (1998) definition, are the two columns of table 1, is between those that address “go/no-go” questions— affective and cognitive processes. Such a that motivate approach or avoidance behav- distinction is pervasive in contemporary ior. Cognitive processes, in contrast, are psychology (e.g., Robert Zajonc 1980, 1984, those that answer true/false questions.5 1998; Zajonc and Daniel McIntosh 1992) Though it is not essential to our overall argu- and neuroscience (Damasio 1994; LeDoux ment, our view is that cognition by itself can- 1996; Panksepp 1998), and has an historical not produce action; to influence behavior, lineage going back to the ancient Greeks the cognitive system must operate via the and earlier (Plato described people as driv- affective system. ing a chariot drawn by two horses, reason Affect, as we use the term, embodies not and passions). only emotions such as anger, fear, and jeal- The distinguishing features of affective ousy, but also drive states such as hunger, processing are somewhat counterintuitive. thirst and sexual desire, and motivational Most people undoubtedly associate affect states such as physical pain, discomfort with feeling states, and indeed most affect (e.g., nausea) and drug craving. Ross Buck states do produce feeling states when they (1999) refers to these latter influences as reach a threshold level of intensity. “biological affects,” which he distinguishes However, most affect probably operates below the threshold of conscious awareness 5 By this definition, neural processes that don’t have valence are not affects. There are also neural processes that produce actions that are not best defined as affects – 4 As David Laibson and Andrew Caplin, respectively, e.g., the reflexes that cause you to draw away from a hot have aptly expressed it. object or an electric shock. mr05_Article 1 3/28/05 3:25 PM Page 19

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from the more traditional “social affects.” processing. Research on “emotional regu- Affect, thus, coincides closely with the his- lation” shows many ways that cognition torical concept of the passions. Although influences emotion, which implies the emotions such as anger and fear might capacity for controlling emotion.7 seem qualitatively different than the bio- The four-quadrant model is just a way to logical affects, they have more in common remind readers that the cognitive–affective that might be supposed. Thus, a recent and controlled–automatic dimensions are study showed that hurt feelings activated not perfectly correlated, and to provide a the same brain regions activated by broken broad view to guide exploratory research. bones or other physical injuries (Naomi For some purposes, reducing the two Eisenberger et al. 2003).6 dimensions to one, or the four quadrants to two, will certainly be useful. Furthermore, 3.1.3 The Quadrants in Action: An noting all four cells is not a claim that all are Illustration equally important. It is just a suggestion that These two dimensions, in combination, leaving out one of the combinations would define four quadrants (labeled I to IV in lead to a model which is incomplete for Table 1). Quadrant I is in charge when you some purposes. deliberate about whether to refinance your Consider what happens when a party host house, poring over present-value calcula- approaches you with a plate of sushi. tions; quadrant II is undoubtedly the rarest Quadrant III: Your first task is to figure in pure form. It is used by “method actors” out what is on the plate. The occipital cor- who imagine previous emotional experi- tex in the back of the brain is the first on the ences so as to actually experience those scene, drawing in signals from your eyes via emotions during a performance; quadrant your optic nerves. It decodes the sushi into III governs the movement of your hand as primitive patterns such as lines and corners you return serve; and quadrant IV makes then uses a “cascading process” to discern you jump when somebody says “Boo!” larger shapes (Stephen Kosslyn 1994). Most behavior results from the interac- Further downstream, in the inferior tempo- tion of all four quadrants. A natural instinct ral visual cortex (ITVC), this information of economists trained in parsimonious becomes integrated with stored representa- modeling is to think that cognition is typi- tions of objects, which permits you to rec- cally controlled, and affect is automatic, so ognize the objects on the plate as sushi. This there are really only two dimensions latter process is extraordinarily complicated (quadrants I and IV) rather than four. But (and has proved difficult for artificial intelli- a lot of cognitive processing is automatic as gence researchers to recreate in computers) well—e.g., visual perception or language because objects can take so many forms, orientations, and sizes. Quadrant IV: This is where affect enters 6 The researchers scanned the brains of subjects using the picture. Neurons in the inferior tempo- fMRI (functional magnetic resonance imaging) as they ral visual cortex are sensitive only to the played a video game designed to produce a feeling of social rejection. Subjects thought they were playing a game that involved throwing a ball back and forth with two other people, but in fact the computer controlled the two ani- mated figures that they saw on the screen. After a period 7 For example, when people are shown unpleasant pho- of three-way play, the two other “players” began to exclude tographs and told to interpret the photos so that they don’t the subjects by throwing the ball back and forth between experience negative emotions (e.g., imagine a picture of themselves. The social snub triggered neural activity in a women crying as having been taken at a wedding), there is part of the brain called the anterior cingulate cortex, which less activity in the insula and amygdala, emotional areas, also processes physical pain, and the insula, which is active and in medial orbitofrontal cortex, and area which the during physical and social discomfort. insula projects to (Kevin Ochsner et al., in press). mr05_Article 1 3/28/05 3:25 PM Page 20

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identity of an object; they don’t tell you when she turns to serve other guests).8 whether it will taste good. Outputs of the These explicit thoughts involve anticipated inferior temporal visual cortex as well as out- feelings (your own and the host’s) and puts from other sensory systems feed into draw on explicit memories from a part of the orbitofrontal cortex to determine the the brain called the hippocampus (see fig- “reward value of the recognized object.” ure 1), inputs from the affective system This is a highly particular representation. In (sometimes referred to as the “limbic sys- economic terms, what is represented is nei- tem”), and anticipation (planning) from ther pure information (i.e., that this is sushi) the prefrontal cortex. nor pure utility (i.e., that it is something I Because standard economics is best like) but rather a fusion of information and described by the controlled, cognitive, utility. It is as if certain neurons in the processes of quadrant 1, in the remainder of orbitofrontal cortex are saying “this is sushi this section we focus on the other half of and I want it.” each dichotomy—automatic and affective The reward value of sushi depends in processes—providing further details of their turn on many factors. First, there is your functioning. personal history with sushi. If you got sick on sushi in the past, you will have an uncon- 3.2 Automatic Processes scious and automatic aversion to it (“taste Here, we review some key principles of aversion conditioning”). The amygdala neural functioning that characterize auto- seems to play a critical role in this kind of matic processes. Our short-list includes: long-term learning (LeDoux 1996). parallelism, specialization, and coordina- Second, the reward value of the sushi will tion. Unpacking this a bit, we would say that: depend on your current level of hunger; (1) much of the brain’s processing involves people can eat almost anything—grass, processes that unfold in parallel and are not bugs, human flesh—if they are hungry enough. The orbitofrontal cortex and a subcortical region called the hypothalamus are 8 Paul Romer (2000) uses the example of peanut tastes sensitive to your level of hunger (Rolls as an illustration of how understanding the cause of 1999). Neurons in these regions fire more revealed preference matters. One person loves the taste of rapidly at the sight or taste of food when peanuts, but is allergic to them and knows that the consequences of eating would be disastrous. When she is hun- you are hungry, and fire less rapidly when gry, her visceral system motivates her to eat peanuts, but you are not hungry. her deliberative system, with its ability to consider delayed Quadrants I and II: Processing often consequences, inhibits her from eating them. The other person developed a “taste aversion” to peanuts many years ends before quadrants I and II go to work. ago, as a result of having gotten sick right after eating If you are hungry, and like sushi, your them. She knows at a cognitive level that the peanuts were motor cortex will guide your arm to reach not the cause of her sickness, but her visceral system over- rules cognitive awareness. Revealed preference theory for the sushi and eat it, drawing on auto- would stop at the conclusion that both women have disu- matic quadrant III (reaching) and IV tility for peanuts. But the fact that the mechanisms under- (taste and enjoyment) processes. Under lying their preferences are different leads to predictable differences in other kinds of behavior. For example, the some circumstances, however, higher level taste-averse woman will have a higher price elasticity processing may enter the picture. If you (she’ll eat peanuts if paid enough) and she will learn to saw a recent documentary on the risks of enjoy peanuts after eating them a few times (her taste- aversion can be “extinguished”). The allergic woman will eating raw fish, you may recoil; or if you also like the smell of peanuts, which the taste-averter dislike sushi but anticipate disappointment won’t. Treatments also differ: cognitive therapies for treat- in the eyes of your proud host who made ing harmless phobias and taste-aversion train people to use their conscious quadrant I processing to overrule visceral the sushi herself, you’ll eat it anyway (or quadrant IV impulses, whereas treatment of the allergic pick it up and discreetly hide it in a napkin peanut-avoider will concentrate on a medical cure. mr05_Article 1 3/30/05 3:19 PM Page 21

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accessible to consciousness; (2) the brain the automatic activity produced by quadrant utilizes multiple systems specialized to per- III and IV processes when they are wrong? form specific functions; and (3) it figures out Indeed sometimes it does: pilots learn to how to use existing specialized systems to trust their instrument panels, even when accomplish new tasks efficiently, whatever they conflict with strong sensory intuitions functions they originally evolved to perform. about where their plane is headed, but such cognitive override is more the exception 3.2.1 Parallelism than the rule. To override automatic The brain performs a huge number of dif- processes, quadrant I has to (a) recognize ferent computations in parallel. Because of the that an initial impression is wrong (which massively interconnected “network” architec- requires self-awareness about behavior in ture of neural systems, computations done in the other quadrants), and then (b) deliber- one part of the brain have the potential to ately correct that impression. But when influence any other computation, even when sense making works outside of consciousness there is no logical connection between the two. it will not generate alarm bells to trigger the Recent psychological research on automat- recognition required in (a). This is surely the ic processing provides many striking examples case in the Epley and Gilovich studies. Even of such spurious interactions. In one particu- when the external influence is obvious and larly clever study, Gary Wells and Richard inappropriate, or the subject is warned Petty (1980) had subjects listen to an editori- ahead of time, the deliberation required to al delivered over headphones while shaking correct the first impression is hard work, their head either up–down, or right–left (sub- competing for mental resources and atten- jects were led to believe that shaking was a tion with all the other work that needs to be legitimate part of the “product test”). Those done at the same moment (Daniel Gilbert who were instructed to shake up–down 2002). The struggle between rapid uncon- reported agreeing with the editorial more scious pattern-detection processes and their than those instructed to shake left–right, pre- slow, effortful modulation by deliberation is sumably because in our culture up–down not a fair contest; so automatic impressions head movement is associated with an attitude will influence behavior much of the time. of acceptance, and left–right with an attitude 3.2.2 Specialization of rejection. A similar impact on preference was also observed in a study in which subjects Neurons in different parts of the brain have were asked to evaluate cartoons while holding different shapes and structures, different func- a pen either clamped horizontally between tional properties, and operate in coordination their teeth or grasping it with pursed lips as if as systems that are functionally specialized. puffing on a cigarette (Fritz Strack, Leonard Progress in neuroscience often involves trac- Martin, and Sabine Stepper 1988). The hori- ing well-known psychological functions to cir- zontal clamp forces the mouth into a smile, cumscribed brain areas. For example, Broca’s which enhances ratings, while “puffing” and Wernicke’s areas are involved, respective- forces the mouth into a pursed expression, ly, in the production and comprehension of which lowers ratings. What the brain seems to language. Patients with Wernicke damage can- be doing, in these examples, is seeking a not understand spoken words. While they can “global equilibrium” that would reconcile the produce words themselves, they can’t monitor forced action (e.g., forced smile) with the their own speech, which results in sentences response and the perceived attributes of the of correctly articulated words strung together evaluated object. into unintelligible gibberish. People with dam- Given that people are capable of delibera- age to Broca’s area, in contrast, can understand tion, why doesn’t quadrant I thinking correct what is said to them and typically know what mr05_Article 1 3/28/05 3:25 PM Page 22

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they want to say, but have difficulty articulat- in his hand that pricked a patient when they ing it, sometimes to the point of not being able shook hands. Later the doctor returned and, to generate any words at all. although he did not remember the doctor, he Beyond uncovering the nature of these nevertheless responded negatively to the specialized systems, neuroscience has led to doctor’s arrival and refused to shake his hand. the discovery of new functional systems, An example of the latter involves the expe- some of which are quite surprising. For rience of fear, and recognition of fear in oth- example, surgeons conducting brain surgery ers. Experiencing an emotion and on an epileptic patient discovered a small recognizing the emotion when displayed region of her brain which, when stimulated, intuitively seems to involve entirely different caused her to laugh (Itzhak Fried 1998), processes. However, recent findings suggest hinting at the existence of a “humor system.” that this is not the case. Numerous studies Neuroscientists have also located an area in have implicated the amygdala—a small the temporal lobe that, when stimulated “organ” in the brain that is also intimately electrically, produces intense religious feel- linked to the sense of smell—to fear pro- ings—e.g., the sense of a holy presence or cessing. Lesions to the amygdala of rats and even explicit visions of God or Christ, even other animals disrupt or even eliminate the in otherwise unreligious people (Michael animals’ fear-responses. Humans with stroke Persinger and Faye Healey 2002). damage in the amygdala show similar More generally, neuroscience has begun deficits in reacting to threatening stimuli. to change our classification of functional The same damage that disrupts fear processes in the brain, in some cases identi- responses in humans also cripples a person’s fying distinct brain processes that serve the ability to recognize facial expressions of fear same function, and in others drawing con- in others, and to represent such expressions nections between processes that have been in pictures. Figure 2 shows how a patient commonly viewed as distinct. with amygdala damage expressed different An example of the former is memory. emotions when asked to draw them in the Studies of patients with localized brain dam- form of facial expressions. The patient was age have confirmed the existence of distinct able to render most emotions with remark- memory systems, which can be selectively able artistic talent. But when it came to “knocked out.” Anterograde amnesiacs, for drawing an expression of fear she felt clue- example, are commonly able to recall infor- less. She didn’t even try to draw an adult mation acquired before injury, and they are face; instead she drew a picture of a crawling able to acquire implicit information, includ- infant looking apprehensive. ing perceptual-motor skills (like the ability to The finding that people who don’t experi- read text in a mirror), but they are unable to ence fear also can’t recognize it or represent it recall new explicit information for more than pictorially, suggests that two phenomena that a minute.9 Anterograde amnesiacs can also had been viewed as distinct—experiencing acquire new emotional associations without and representing fear—in fact have important the explicit memories necessary to make commonalities. Beyond this, they point to the sense of them. In one famous example, a doc- intriguing notion that to recognize an emotion tor introduced himself with a tack concealed in others, one needs to be able to experience it oneself (see Alvin Goldman 2003). 9 Retrograde amnesia is the more familiar kind, in The idea that people have specialized sys- which people forget their past but can form new memo- tems that are invoked in specific situations ries. The 2000 movie “Memento” drew an accurate por- could have dramatic consequences for eco- trait of anterograde amnesia and—interestingly for economists— its vulnerability to exploitation by people nomics. The standard model of economic who know you are forgetting what they did to you. behavior assumes that people have a unitary mr05_Article 1 3/28/05 3:25 PM Page 23

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Figure 2. Representations of different emotions drawn by a patient with amygdala damage (Adolphs et al. 1995).

set of preferences which they seek to satisfy, brains have different systems that they use to and economists often criticize psychology for solve different problems.” lacking such a unified perspective. The existence of such selectively—invoked, special- 3.2.3 Coordination ized, systems, however, raises the question of whether a unified account of behavior In a process that is not well understood, is likely to do a very good job of capturing the brain figures out how to do the tasks it is the complexities of human behavior. As assigned efficiently, using the specialized sys- Jonathan Cohen (personal communication) tems it has at its disposal. When the brain is aptly expressed it at a recent conference on confronted with a new problem it initially neuroeconomics, “Economics has one theo- draws heavily on diverse regions, including, ry, psychologists many—perhaps because often, the prefrontal cortex (where controlled mr05_Article 1 3/28/05 3:25 PM Page 24

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Figure 3. Regions of brain activation when first playing Tetris (left) and after several weeks of practice (right) (Haier et al. 1992).

processes are concentrated). But over time, Andrew Lo and Dmitry Repin (2002) activity becomes more streamlined, concen- observe a similar result in a remarkable trating in regions that specialized in process- study of professional foreign-exchange and ing relevant to the task. In one study derivatives traders who were wired for psy- (Richard Haier et al. 1992), subjects’ brains chophysiological measurements while they were imaged at different points in time as traded. Less-experienced traders showed they gained experience with the computer significant physiological reactions to about game Tetris, which requires rapid hand–eye half of the market events (e.g., trend rever- coordination and spatial reasoning. When sals). More experienced traders reacted subjects began playing, they were highly much less to the same events. Years of aroused and many parts of the brain were automatizing apparently enabled seasonal active (Figure 3, left panel). However, as they traders to react calmly to dramatic events got better at the game, overall blood flow to that send a novice trader on an emotional the brain decreased markedly, and activity roller coaster. became localized in only a few brain regions Given the severe limitations of controlled (Figure 3, right panel). processes, the brain is constantly in the Much as an economy ideally adjusts to the process of automating the processing of introduction of a new product by gradually tasks—i.e., executing them using automatic shifting production to the firms that can pro- rather than controlled processes. Indeed, duce the best goods most cheaply, with expe- one of the hallmarks of expertise in an area is rience at a task or problem, the brain seems the use of automatic processes such as visual to gradually shift processing toward brain imagery and categorization. In one now- regions and specialized systems that can famous study, Fernand Gobet and Simon solve problems automatically and efficiently (1996) tested memory for configurations of with low effort. chess pieces positioned on a chessboard. mr05_Article 1 3/28/05 3:25 PM Page 25

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They found that expert chess players were neural activity is distilled into a categorical able to store the positions of players almost percept, or a decision, we do know that the instantly—but only if they were in positions brain doesn’t invariably integrate (i.e., aver- corresponding to a plausible game. For ran- age) over the signals carried by individual domly arranged chess pieces, the experts neurons. In particular, when two distinct were not much better than novices. Further groups of neurons convey different informa- investigations have found that chess grand- tion about the external world, the resulting masters store roughly 10,000 different possi- perceptual judgment often adopts the infor- ble board setups in memory which they can mation of one neuronal group and entirely recognize almost instantly and respond to. suppresses the information carried by the More recent research in decision making other. This is referred to as a “winner-take- suggests that this is a more general phenom- all” principle of neural signal-extraction. As a enon, because decision making often takes result, many brain processes are fundamen- the form of pattern matching rather than of tally categorical, yielding well-defined per- an explicit weighing of costs and benefits ceptions and thoughts even if the incoming (e.g., Robyn Leboeuf 2002; Doug Medin information is highly ambiguous.10 The and Max Bazerman 1999). advantages of this principle are clear if the In some cases, repeated use of particular ultimate job of the brain is to initiate a dis- specialized systems can produce physically crete action, or categorize an object as one of recognizable changes. Studies have found several discrete types. The disadvantage is that, for example, violinists who finger violin that updating of beliefs in response to new strings with their left hand show enlarged information can procede in fits and starts, development of cortical regions which corre- with beliefs remaining static as long as the spond to fingers on the left hand (Thomas new information does not lead to recatego- Elbert et al. 1995), and the brain regions rization, but changing abruptly and dramati- responsible for navigation and spatial mem- cally when the accumulation of evidence ory (the hippocampus) of London taxi driv- results in a change of categorization (see ers are larger than comparable areas in Sendhil Mullainathan 2002). non-taxi drivers (Eleanor Maguire et al. 3.3 Affective Processes 2000). While the exact causality is difficult to determine (perhaps preexisting differences The way the brain evolved is critical to in size of brain region affect people’s talents understanding human behavior. In many and occupational choices), a causal connec- domains, such as eating, drinking, sex, and tion in the posited direction has been even drug use, human behavior resembles demonstrated in songbirds, whose brains that of our close mammalian relatives, which show observable differences as a function of is not surprising because we share many of whether or not they have been exposed to the neural mechanisms that are largely the song that is characteristic of their species responsible for these behaviors. Many of the (Carol Whaling et al. 1997).

3.2.4 The Winner Take All Nature of 10 Alternatively, one could imagine that perceptions or Neural Processing beliefs aggregate all relevant neural information (which would also be more in tune with Bayesian updating). So far Another feature that is reminiscent of the as we can tell, the brain can use both principles of aggre- gation: when different neural populations carry “similar” operation of an economy is the “winner-take- information, then the overall perceptual judgment is an all” nature of neural information processing average of all information; when they carry very different (M. James Nichols and Bill Newsome 2002). information, then the overall judgment follows the “winner-take-all” rule (Nichols and Newsome 2002). For a sim- While there is a lot that we do not know ple model of a neural network that exhibits these about the way in which the huge amount of properties, see Richard Hahnloser et al. 2000. mr05_Article 1 3/28/05 3:25 PM Page 26

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processes that occur in these systems are LeDoux and his colleagues (summarized in affective rather than cognitive; they are LeDoux 1996) have arrived at similar conclu- directly concerned with motivation. This sions about the primacy of affect using very might not matter for economics were it not different research methods and subjects. for the fact that the principles that guide the Based on studies conducted on rats, they dis- affective system—the way that it operates— covered that there are direct neural projec- is so much at variance with the standard tions from the sensory thalamus (which economic account of behavior. performs crude signal-processing) to the amygdala (which is widely believed to play a 3.3.1 Primacy of Affect critical role in the processing of affective In contrast to the intuitive view of human stimuli) that are not channeled through the behavior as driven by deliberations about neocortex. As a result, animals can have an costs and benefits, it does not do a terrible affective reaction to stimuli before their cor- injustice to the field of psychology to say that tex has had the chance to perform more a growing consensus has developed around refined processing of the stimuli—they are lit- the view that affect is primary in the sense erally afraid before knowing whether they that it is “first on the scene” and plays a dom- should be. Such immediate affective respons- inant role in behavior. Indeed, as we discuss es provide organisms with a fast but crude below (section 3.4.2), the conscious brain assessment of the behavioral options they face often erroneously interprets behavior that which makes it possible to take rapid action. emerges from automatic, affective, processes They also provide a mechanism for interrupt- as the outcome of cognitive deliberations. ing and refocusing attention (Simon 1967), In a series of seminal papers, Zajonc (1980, typically shifting processing from automatic to 1984, 1998) presented the results of studies controlled processing. As Jorge Armony et al. which showed, first, that people can often (1995) note, “A threatening signal, such as identify their affective reaction to someone indicating the presence of a predator, thing—whether they like it or not—more arising from outside of the focus of attention rapidly than they can even say what it is, and, will have a reduced representation in the cor- second, that affective reactions to things can tex. Thus, if the amygdala relied solely on the be dissociated from memory for details of cortical pathway to receive sensory informa- those things, with the former often being bet- tion, it would not be capable of processing, ter. For example, we often remember and responding to, those danger signals that whether we liked or disliked a particular per- are not within the focus of attention” (see also, son, book or movie, without being able to Armony et al. 1997; Gavin DeBecker 1997).11 remember any other details (Bargh 1984). A similar pattern to the one LeDoux Subsequent research in social psychology observed in rats can also be seen in humans. takes Zajonc’s initial research a step further Gilbert and Michael Gill (2000) propose that by showing that the human brain affectively people are “momentary realists” who trust tags virtually all objects and concepts, and their immediate emotional reactions and that these affective tags are brought to mind only correct them through a comparatively effortlessly and automatically when those laborious cognitive process. If the car behind objects and concepts are evoked (e.g., Russell 11 Fazio et al. 1986; Anthony Greenwald, Mark The amygdala has excellent properties for performing such a function. Recent research in which amygdalae Klinger, and Thomas Liu 1989; Greenwald of subjects were scanned while threatening stimuli were 1992; Bargh, Shelly Chaiken, Paula flashed at various positions in the visual field found that Raymond, and Charles Hymes 1996; Jan De amygdala activation is just as rapid and just as pronounced when such stimuli are presented outside as when they are Houwer, Dirk Hermans, and Paul Eelen presented inside the region of conscious awareness (Adam 1998; David Houston and Fazio 1989) Anderson et al. 2003). mr05_Article 1 3/28/05 3:25 PM Page 27

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you honks after your light turns green, you cold or turning on the air conditioner when are likely to respond with immediate anger, hot. The brain motivates one to take such followed, perhaps, by a sheepish acknowl- actions using both a “carrot” and a “stick.” edgment that maybe the honking person The stick reflects the fact that departing behind you had a point, as you were dis- from a set-point usually feels bad—e.g., it tracted when the light turned green. feels bad to be either excessively hot or It is important to note that while emotions cold—and this negative feeling motivates may be fleeting, they can have a large eco- one to take actions that move one back nomic impact if they create irreversible rash toward the set-point. The carrot is a process decisions (as in “crimes of passion”). Even called “alliesthesia” (Michael Cabanac emotions which could be transitory, such as 1979) whereby actions that move one embarrassment, can have long-run effects if toward the set-point tend to feel pleasura- they are kept alive by memory and social ble. When the body temperature falls below reminders. For example, Dora Costa and 98.6°, for example, almost anything that Matthew Kahn (2004) found that deserters raises body temperature (such as placing in the Union Army during the Civil War, who one’s hand in warm water) feels good, and were allowed to return to their hometowns conversely when the body temperature is without explicit penalty, often moved away elevated almost anything that lowers body because of the shame and social ostracism of temperature feels good. being known to their neighbors as a deserter. As economists, we are used to thinking of preferences as the starting point for human 3.3.2 Homeostasis behavior and behavior as the ending point. A To understand how the affective system neuroscience perspective, in contrast, views operates, one needs to recall that humans did explicit behavior as only one of many mech- not evolve to be happy, but to survive and anisms that the brain uses to maintain home- reproduce. An important process by which ostasis, and preferences as transient state the body attempts to achieve these goals is variables that ensure survival and reproduc- called homeostasis. Homeostasis involves tion. The traditional economic account of detectors that monitor when a system departs behavior, which assumes that humans act so from a “set-point,”12 and mechanisms that as to maximally satisfy their preferences, restore equilibrium when such departures starts in the middle (or perhaps even toward are detected. Some—indeed most—of these the end) of the neuroscience account. mechanisms do not involve deliberate action. Rather than viewing pleasure as the goal of Thus, when the core body temperature falls human behavior, a more realistic account below the 98.6° F set-point, blood tends to would view pleasure as a homeostatic cue— be withdrawn from extremities, and when it an informational signal.13,14 rises above the set-point one begins to sweat. But other processes do involve deliberate 13 Even deliberative behavior generated by quadrant I action—e.g., putting on one’s jacket when is typically organized in a fashion that resembles homeostasis (Miller, Eugene Gallanter, and Karl Pribram 1960; Loewenstein 1999). Rather than simply maximizing pref- 12 The mechanisms that monitor the body’s state can erences in a limitless fashion, people set goals for them- be exquisitely complex, and can include both internal and selves, monitor their progress toward those goals, and external cues. In the case of nutritional regulation, for adjust behavior when they fall short of their goals. example, internal cues include gastric distension (James 14 Of course, even the neuroscience account begins, in Gibbs et al. 1981), receptors sensitive to the chemical some sense, in the middle. A more complete understand- composition of the food draining from the stomach D. ing of behavior would also ask how these different mecha- Greenberg, Smith and Gibbs (1990); Arthur L. nisms evolved over time. Since evolution selects for genes Campfield and Smith 1990). External cues include time that survive and reproduce, the result of evolution is of day, estimated time till the next feeding, and the sight unlikely to maximize pleasure or minimize pain. (See Gary or smell of food. Becker and Luis Rayo 2004.) mr05_Article 1 3/28/05 3:25 PM Page 28

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An important feature of many homeosta- encodes whether an outcome is a gain or a tic systems is that they are highly attuned to loss (see section 5), why self-reported hap- changes in stimuli rather than their levels. A piness (and behavioral indicators like sui- dramatic demonstration of such sensitivity cide) depend on changes in income and to change came from single-neuron studies wealth, rather than levels (Andrew Oswald of monkeys responding to juice rewards 1997), and why violations of expectations (see Wolfram Schultz and Anthony trigger powerful emotional responses Dickinson 2000). These studies measured (George Mandler 1982). the firing of dopamine neurons in the ani- 3.4 Interactions between the Systems mal’s ventral striatum, which is known to play a powerful role in motivation and Behavior emerges from a continuous action. In their paradigm, a tone was sound- interplay between neural systems supported, and two seconds later a juice reward was ing activity within each of the four quad- squirted into the monkey’s mouth. Initially, rants. Three aspects of this interaction bear the neurons did not fire until the juice was special emphasis, which we labeled “collab- delivered. Once the animal learned that the oration,” “competition,” and “sense-mak- tone forecasted the arrival of juice two sec- ing.” Collaboration captures the insight that onds later, however, the same neurons fired decision making, which is to say “rationality” at the sound of the tone, but did not fire in the broad, nontechnical sense of the when the juice reward arrived. These neu- word, is not a matter of shifting decision- rons were not responding to reward, or its making authority from quadrants II, III, and absence . . . they were responding to devia- IV toward the deliberative, nonaffective tions from expectations. (They are some- quadrant I, but more a matter of maintain- times called “prediction neurons.”) When ing proper collaboration in activity across all the juice was expected from the tone, but four quadrants. If quadrant I tries to do the was not delivered, the neurons fired at a job alone, it will often fail.16 Competition very low rate, as if expressing disappoint- reflects the fact that different processes— ment. The same pattern can be observed at most notably affective and cognitive—often a behavioral level in animals, who will work drive behavior in conflicting directions and harder (temporarily) when a reinforcement compete for control of behavior. Sense- is suddenly increased and go “on strike” making refers to how we make sense of such when reinforcement falls.15 Neural sensitiv- collaboration and competition—how we ity to change is probably important in make sense of our behavior. While behavior explaining why the evaluation of risky gam- is, in fact, determined by the interaction of bles depends on a reference point which all four quadrants, conscious reflection on our behavior, and articulating reasons for it, is basically quadrant I trying to make sense 15 As Rolls (1999) writes, “We are sensitive to some of that interaction. And, not surprisingly, extent not just to the absolute level of reinforcement being received, but also to the change in the rate or magnitude of reinforcers being received. This is well shown by the phenomena of positive and negative contrast effects with 16 Roy Baumeister, Todd Heatherton, and Dianne Tice rewards. Positive contrast occurs when the magnitude of a (1994) review studies which suggest that excessively high reward is increased. An animal will work very much hard- incentives can result in supra-optimal levels of motivation er for a period (perhaps lasting for minutes or longer) in that have perverse effects on performance (known as the this situation, before gradually reverting to a rate close to Yerkes–Dodson law). Beyond documenting such “choking that at which the animal was working for the small rein- under pressure,” the review research showing that it often forcement. A comparable contrast effect is seen when the occurs because it causes people to utilize controlled reward magnitude (or rate at which rewards are obtained) processes for performing functions, such as swinging a golf is reduced—there is a negative overshoot in the rate of club, that are best accomplished with automatic processes. working for a time.” See Dan Ariely et al. (2004) for the latest evidence. mr05_Article 1 3/28/05 3:25 PM Page 29

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quadrant I has a tendency to explain behav- There is also interesting experimental evi- ior in terms it can understand – in terms of dence that deliberative thinking blocks quadrant I processes. access to one’s emotional reactions to objects and so reduces the quality of decisions (e.g., 3.4.1 Collaboration and Competition Wilson and Schooler 1991). In one study Although it is heuristically useful to distin- (Wilson et al. 1993) college students select- guish between cognitive and affective ed their favorite poster from a set of posters. processes, and between controlled and auto- Those who were instructed to think of rea- matic processes, most judgments and behav- sons why they liked or disliked the posters iors result from interactions between them. before making their selection ended up less Collaboration, delegation of activity, and happy on average with their choice of proper balance across the quadrants are posters (and less likely to keep them up on essential to normal decision making. Many their dorm room wall) than subjects who decision-making disorders may originate in were not asked to provide reasons. an improper division of labor between the Needless to say, affect can also distort cog- quadrants. For example, psychiatry recog- nitive judgments. For example, emotions nizes a decision-making continuum defined have powerful effects on memory—e.g., by the impulsive, “light” decision-making when people become sad, they tend to recall style at one end and the compulsive, “heavy” sad memories (which often increases their style at the other. The decisions of an impul- sadness). Emotions also affect perceptions of sive individual are excessively influenced by risks—anger makes people less threatened external stimuli, pressures, and demands. by risks, and sadness makes them more Such a person may not be able to give a more threatened (Jennifer Lerner and Dacher satisfying explanation of an action except Keltner 2001). Emotions also create “moti- that “he felt like it” (David Shapiro 1965). By vated cognition”—people are good at per- contrast, an obsessive–compulsive person suading themselves that what they would will subject even the most trivial decisions to like to happen is what will happen. Quack extensive deliberation and calculation. In sit- remedies for desperate sick people, and get- uations in which it is entirely appropriate to rich-quick scams are undoubtedly aided by make a quick decision based “on impulse”— the human propensity for wishful thinking. e.g., when choosing which video to rent Wishful thinking may also explain high rates for the evening or what to order in a of new business failure (Camerer and Dan restaurant—the obsessive-compulsive will Lovallo 1999), trading in financial markets, get stuck. undersaving, and low rates of investment in We are only now beginning to appreciate education (foregoing large economic the importance of affect for normal decision returns). As LeDoux (1996) writes, “While making. The affective system provides inputs conscious control over emotions is weak, in the form of affective evaluations of behav- emotions can flood consciousness. This is ioral options—what Damasio (1994) refers so because the wiring of the brain at this to as “somatic markers.” Damasio and his point in our evolutionary history is such that colleagues show that individuals with mini- connections from the emotional systems to mal cognitive, but major affective deficits the cognitive systems are stronger than con- have difficulty making decisions, and often nections from the cognitive systems to the make poor decisions when they do (Antoine emotional systems.” Bechara et al. 1994; Bechara, Damasio, When it comes to spending money or Damasio, and Lee 1999; Damasio 1994). It is delaying gratification, taking or avoiding not enough to “know” what should be done; risks, and behaving kindly or nastily toward it is also necessary to “feel” it. other people, people often find themselves mr05_Article 1 3/28/05 3:25 PM Page 30

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of “two minds”; our affective systems drive us well understood. At a neurological level, it in one direction and cognitive deliberations appears that an organ in the reptilian brain in another. We find ourselves almost compul- called the striatum (part of a larger system sively eating our children’s left-over called the basal ganglia) plays a critical role. Halloween candy, while obsessing about how The striatum receives inputs from all parts of to lose the extra ten pounds; gambling reck- the cerebral cortex, including the motor cor- lessly at the casino, even as a small voice in tex, as well as from affective systems such as our head tell us to rein it in; trying to build up the amygdala. Lesions of pathways that sup- courage to step up to the podium; or tempt- ply dopamine to the striatum leads, in ani- ed to give a little to the pathetic street-corner mals, to a failure to orient to stimuli, a failure beggar though we know our crumpled dollar to initiate movements, and a failure to eat or will go further if donated to United Way. drink (J. F. Marshall et al. 1974). In humans, All of these deviations occur because our depletion of dopamine in the striatum is affective system responds to different cues, found in Parkinson’s disease, the most dra- and differently to the same cues, as our matic symptom of which is a lack of volun- cognitive system does. As Rolls (1999) tary movement. The striatum seems to be writes, involved in the selection of behaviors from competition between different cognitive and emotions often seem very intense in humans, affective systems—in producing one coher- indeed sometimes so intense that they produce ent stream of behavioral output, which can behaviour which does not seem to be adaptive, be interrupted if a signal of higher priority is such as fainting instead of producing an active escape response, or freezing instead of avoiding, received, or a surprising stimulus appears or vacillating endlessly about emotional situa- (Carolyn Zink et al. 2003). tions and decisions, or falling hopelessly in love The extent of collaboration and competi- even when it can be predicted to be without tion between cognitive and affective sys- hope or to bring ruin. The puzzle is not only that tems, and the outcome of conflict when it the emotion is so intense, but also that even with our rational, reasoning, capacities, humans still occurs, depends critically on the intensity of find themselves in these situations, and may find affect (Loewenstein 1996; Loewenstein and it difficult to produce reasonable and effective Lerner 2003). At low levels of intensity, behaviour for resolving the situation (p. 282). affect appears to play a largely “advisory” role. A number of theories posit that emo- Such divergences between emotional reactions carry information that people use as an tions and cognitive evaluations arise, Rolls input into the decisions they face (e.g., (1999) argues, because Damasio 1994; Ellen Peters and Paul Slovic 2000). The best-developed of these in humans the reward and punishment systems approaches is affect-as-information theory may operate implicitly in comparable ways to (Norbert Schwarz and Gerald Clore 1983; those in other animals. But in addition to this, humans have the explicit system (closely related Schwarz 1990; Clore 1992). to consciousness) which enables us consciously At intermediate levels of intensity, peo- to look and predict many steps ahead. (p. 282). ple begin to become conscious of conflicts between cognitive and affective inputs. It Thus, for example, the sight or smell of a is at such intermediate levels of intensity cookie might initiate motivation to consume that one observes the types of efforts at on the part of the affective system, but might self-control that have received so much also remind the cognitive system that one is attention in the literature (Jon Elster 1977; on a diet. Walter Mischel, Ebbe Ebbesen, and Exactly how cognitive and affective sys- Antonette Zeiss 1972; Thomas Schelling tems interact in the control of behavior is not 1978, 1984). mr05_Article 1 3/28/05 3:25 PM Page 31

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Finally, at even greater levels of intensity, both the sensation of intention and the overt affect can be so powerful as to virtually pre- action are caused by prior neural events clude decision making. No one “decides” to which are inaccessible to consciousness (see fall asleep at the wheel, but many people do. Daniel Wegner and Thalia Wheatley 1999).17 Under the influence of intense affective Quadrant I tends to explain behavior ego- motivation, people often report themselves as centrically—to attribute it to the types of being “out of control” or “acting against their deliberative processes that it is responsible own self-interest” (Baumeister, Heatherton, for (see Richard Nisbett and Wilson 1977). A and Tice 1994; Stephen Hoch and dramatic study demonstrating this phenom- Loewenstein 1991; Loewenstein 1996). As enon was conducted with a “split-brain” Rita Carter writes, “where thought conflicts patient (who had an operation separating the with emotion, the latter is designed by the connection between the two hemispheres of neural circuitry in our brains to win” (1999). his brain). The patient’s right hemisphere could interpret language but not speak, and 3.4.2 Spurious Sense-Making the left hemisphere could speak (LeDoux Sense-making is an important form of 1996). The patient’s right hemisphere was interaction between quadrant I and the instructed to wave his hand (by showing the other quadrants. The brain’s powerful drive word “wave” on the left part of a visual toward sense making leads us to strive to screen, which only the right hemisphere interpret our own behavior. Since quadrant I processed). The left hemisphere saw the often does not have conscious access to right hand waving but was unaware of the activity in the other quadrants, it is perhaps instructions that had been given to the right not surprising that it tends to over-attribute hemisphere (because the cross-hemisphere behavior to itself—i.e., to deliberative deci- connections were severed). When the sion processes. Even though much of the patient was asked why he waved, the left brain’s activity is “cognitively inaccessible,” hemisphere (acting as spokesperson for the we have the illusion that we are able to make entire body) invariably came up with a plau- sense of it, and we tend to make sense of it sible explanation, like “I saw somebody I in terms of quadrant I processes. knew and waved at them.” Research with EEG recordings has shown (Benjamin Libet 1985) that the precise 4. General Implications of moment at which we become aware of an Neuroscience for Economics intention to perform an action trails the initial wave of brain activity associated with that To add value to economics, neuroscience action (the EEG “readiness potential”) by needs to suggest new insights and useful about 300 msec. The overt behavioral perspectives on old problems. This section response itself then follows the sensation of discusses some broad implications for eco- intention by another 200 msec. Hence, what nomics of the ideas and findings reviewed in is registered in consciousness is a regular the previous section. First, we show that pairing of the sensation of intention followed neuroscience findings raise questions about by the overt behavior. Because the neural the usefulness of some of the most common activity antecedent to the intention is inac- constructs that economists commonly use, cessible to consciousness, we experience such as risk aversion, time preference, and “free will” (i.e., we cannot identify anything that is causing the feeling of intention). 17 Because the behavior reliably follows the “… the brain contains a specific cognitive system that binds intentional actions to their effects to construct a intention, we feel that this “freely willed” coherent experience of our own agency” (Patrick Haggard, intention is causing the action—but in fact, Sam Clark, and Jeri Kalogeras 2002). mr05_Article 1 3/28/05 3:25 PM Page 32

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altruism. Second, we show how the exis- economic analyses typically assume that the tence of specialized systems challenges same degree of time preference is present standard assumptions about human infor- for all intertemporal tradeoffs— saving for mation processing and suggests that intelli- the future, flossing your teeth, dieting, and gence and its opposite—bounded getting a tattoo. For example, whether a per- rationality—are likely to be highly domain- son smokes is sometimes taken as a crude specific. Third, brain-scans conducted while proxy for low rates of time discounting, in people win or lose money suggest that studies of educational investment or savings. money activates similar reward areas as do Thinking about the modularity of the brain other “primary reinforcers” like food and suggests that while different intertemporal drugs, which implies that money confers tradeoffs may have some element of plan- direct utility, rather than simply being val- ning in common (e.g., activity in prefrontal ued only for what it can buy. Fourth, we cortex), different types of intertemporal show that research on the motivational and choices are likely to invoke qualitatively dif- pleasure systems of the brain human chal- ferent mixtures of neural systems and hence lenges the assumed connection between to produce entirely different patterns of motivation and pleasure. Finally, we behavior. Then measured discount rates will describe some of the important implications not be perfectly correlated across domains, of cognitive inaccessibility for economics. and might hardly be correlated at all. Much as the study of memory has been 4.1 Economic Constructs refined by the identification of distinct mem- Knowing how the brain solves problems, ory systems, each with its own properties of and what specialized systems it has at its dis- learning, forgetting, and retrieval; the study of posal to do so, challenges some of our fun- intertemporal choice might be enhanced by a damental assumptions about how people similar decomposition, most likely informed differ from one-another when it comes to by neuroscience research. For example, economic behavior. Economists currently unpublished research by Loewenstein and classify individuals on such dimensions as Roberto Weber suggests that, in normal sam- “time preference,” “risk preference,” and ples, future-oriented behaviors tend to clus- “altruism.” These are seen as characteristics ter in tasks which tap different dimensions of that are stable within an individual over time self-control. For example, flossing your teeth and consistent across activities; someone is statistically associated with a number of who is risk-seeking in one domain is expect- other minor, repetitive, helpful behaviors ed to be risk-seeking in other domains as such as feeding parking meters religiously well. But empirical evidence shows that risk- and being on time for appointments. These taking, time discounting, and altruism are behaviors seem to involve “conscientious- very weakly correlated or uncorrelated ness,” an important measure in personality across situations. This inconsistency results theory.18 John Ameriks, Andrew Caplin, and in part from the fact that preferences are John Leahy (in press) measured the propen- state-contingent (and that people may not sity to plan by asking TIAA–CREF enrollees recognize the state-contingency, which—if to disagree or agree with statements like “I they did—would trigger overrides that have spent a great deal of time developing a impose more consistency than observed). financial plan.” These measures correlate But it also may point to fundamental prob- with actual savings rates. lems with the constructs that we use to Dieting and use of addictive drugs, in define how people differ from each other. contrast to punctuality and flossing, might As an illustration, take the concept of be involve very different circuitry and time-preference. In empirical applications, hence reveal fundamentally different dis- mr05_Article 1 3/28/05 3:25 PM Page 33

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counting behavior. Both of these activities processed by specialized systems, but rela- involve visceral motives that seem to differ tively obtuse when they are forced to rely on reliably across persons and may be only controlled processes. weakly linked to conscientiousness. If A neat illustration of this is provided by the you’re the kind of person who loves to eat, “Wason four-card problem” in logic. Subjects or drink alcohol, then resisting indulging in are shown four cards, each with a letter on those activities requires difficult exertion of one side and a number on the other. The self-control. exposed card faces read “X,” “Y,” “1,” and “2.” Subjects are asked which cards would need to 4.2 Domain-Specific Expertise be turned over to test the rule: “If there is an Economics implicitly assumes that people Xonone side there is a 2 on the other.” Few have general cognitive capabilities that can subjects give the right answers, which are X be applied to any type of problem and, and 1 (if there’s an X on the opposite side of hence, that people will perform equivalently the “1” the rule is broken). However, most on problems that have similar structure. The subjects give the right answer when the logi- existence of systems that evolved to perform cally equivalent problem is put in a cheating- specific functions, in contrast, suggests that detection frame. For example, if there are performance will depend critically on four children from two different towns and whether a problem that one confronts can two school districts and the rule is “If a child be, and is in fact, processed by a specialized lives in Concord he or she must go to system that is well adapted to that form of Concord High,” most subjects realize that the processing. When a specialized system exists home address of the student who does not go and is applied to a particular task, processing to Concord High must be checked to see if is rapid and the task feels relatively effort- she is cheating and not going to Concord less. Automatic processes involved in vision, High when she should (Cosmides 1989). for example, are lightning fast and occur Of particular interest to economics, many with no feeling of mental effort, so people neuroscientists believe there is a specialized are not aware of the power and sophistica- “mentalizing” (or “theory of mind”) module, tion of the processes that allow it to happen. which controls a person’s inferences about Even the most powerful computers don’t what other people believe, feel, or might hold a candle to humans when it comes to do. The hint at the existence of such a ded- visual perception or voice recognition. icated module came from tests conducted When we lack such tailored systems, how- by developmental psychologists in which ever, we are likely to seem extraordinarily two children are shown an object in the flat-footed because we will be forced to process of being concealed (see Uta Frith “muscle it out” with quadrant 1 processing, 2001a). One child then leaves, and the much as autistic individuals seem to solve other child observes as the object is moved theory of mind problems by building up a to a new location. The child who remains in statistical understanding of appropriate the room is then asked to predict where the social behavior. As a general rule, we should child who left will look for the object when expect people to be geniuses when present- she returns. Normal children are typically ed with problems that can be, and are able to solve this problem around age three or four. Autistic children as a rule master 18 Based on the observation that drugs affecting sero- this distinction much later (8–12 years), and tonin receptors are used to treat compulsion disorders, with great difficulty, although some (espe- compulsivity appears to have some connection to the neu- cially those with “Asperger syndrome”) rotransmitter serotonin, In addition, compulsion disorders are thought to be related to hyperactivity in the caudate have normal or superior intelligence. At the nucleus, a “reminder” region of the limbic system. same time, the autistic child will have no mr05_Article 1 3/28/05 3:25 PM Page 34

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difficulty with general inferences having a specifically turned on by mentalizing activi- similar logical form (e.g., if a photo is taken ty. Neuroscience is not there yet, but recent of the object’s location, and the object is single-cell recordings in monkeys have iden- then moved, they will correctly infer that tified an intriguing class of “mirror neurons” the photo will register the object in the old in the prefrontal cortex, which fire either place, before it was moved). when an experimenter performs a physical Autistic adult individuals may compensate action (e.g., grasping a peanut) or when the in many ways and eventually pass such basic monkey performs (“mirrors”) the same tests of mentalizing. However, they have dif- action. Having such neurons makes learning ficulty appreciating more subtle social by imitation easy and supports mind reading meanings (e.g., irony), and will sometimes by, for example, internally simulating the wonder at the “uncanny ability” of facial expressions of others. non–autistic persons to “read minds” (Frith Mentalizing is relevant for economics 2001b). People with Asperger’s syndrome, because many judgments require agents to who are intelligent but have trouble under- make guesses about how other people feel or standing emotions in others, show lower what they will do. The concept of equilibri- activation in the medial prefrontal regions as um requires that agents correctly anticipate compared with normals when presented what others will do; presumably this arises with problems that involve mentalizing, but because of accurate mentalizing, or through also show greater activation in more ventral some kind of specific learning about behav- (lower) region of the prefrontal cortex, ior which may not transfer well to new which is normally responsible for general domains or when variables change. reasoning (Francesca Happe et al. 1996). A Furthermore, the kind of learning about natural interpretation is that Asperger indi- players’ “types” from observation in viduals eventually deduce the answer Bayesian–Nash equilibrium is modeled as through a complex process of reasoning simply Bayesian updating of the likelihoods instead of grasping it directly by a special- of chance events in the face of new informa- ized module, as if they create a neural tion. Since mentalizing is a special ability, “workaround” or “long-cut.” In the medical and logical-deductive reasoning can only literature, one can also find patients with partially compensate for its absence, treating brain lesions who exhibit difficulties with inference about behavior of other agents and mentalizing tasks but not with other types of “nature” is a simplification which may be cognition (Andrea Rowe et al. 2001; James wrong.19 Blair and Lisa Cipolotti 2000). This, too, is consistent with the hypothesis of a separable mentalizing module. 19 Our point here is simple: Circuitry that controls The possibility of a mentalizing module updating of frequencies of events in the world—whether it snows in Chicago in January—may be dissociated from cir- has gained credibility and substance through cuitry that controls updating of personal “types” from converging neuroscientific evidence. fMRI behavior. The circuitry which controls attributions of pay- studies have shown that when normal adults off types to people, from their behavior, requires a concept of how types link to behavior (i.e., what are types?), as well are given pairs of closely matching judgment as updating of types (i.e., reputations) from behavior. An problems, differing only in whether they do autist with theory of mind deficits, for example, might or do not require mentalizing, the mentaliz- keep very accurate counts of relative frequencies (in fact, many autists are obsessed with counting objects in special ing problems lead to greater activation in the categories) but be unable to tell whether a person behaved left medial prefrontal cortex (Fletcher et al. badly in a game because of bad intentions or situational 1995; Rebecca Saxe and Nancy Kanwisher influences (such as a bureaucrat who is pressured to stick to rules). So there is no reason to think that updating about 2003). As ultimate proof, one would like to event frequencies is necessarily the same as updating identify neuronal populations that are about personal types. mr05_Article 1 3/28/05 3:25 PM Page 35

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The existence of domain-specific expertise regions (at the top of Figure 4) both receive suggests that people will appear to be input from “lower” systems (dopaminergic geniuses at some tasks but will seem neurons and the amygdala), and also feed remarkably flat-footed when dealing with back processed information to the striatum. other tasks that may be only superficially dif- The idea that many rewards are processed ferent. Domain-specific processing has similarly in the brain has important implica- important implications for economics, and tions for economics, which assumes that the specifically for the organization of labor. marginal utility of money depends on what Bundling tasks together into jobs, for exam- money buys. Of course, it is possible that ple, requires an understanding of which kind money rewards activate the same circuitry as of skills are general (useful for many tasks) sports cars, cocaine, and jokes because the and which are neurally separate. circuitry is being used to evaluate money in terms of the goods that it buys (which 4.3 Utility for Money requires a cortical process that “simulates” As discussed earlier, neuroscience can the value of those goods internally to the point out commonalities between categories brain). But it is also possible that money that had been viewed as distinct. An example becomes what psychologists call a “primary of this with important implications for eco- reinforcer,” which means that people value nomics is the utility for money. The canoni- money without carefully computing what cal economic model assumes that the utility they plan to buy with it. Neuroeconomics is for money is indirect—i.e., that money is a not nearly advanced enough to separate these mere counter, only valued for the goods and two roles for midbrain responses to money, services it can procure. Thus, standard eco- but suggests the possibility that the brain nomics would view, say, the pleasure from value of money is only loosely linked to con- food or cocaine and the “pleasure” from sumption utility, which in turn suggests a obtaining money as two totally different phe- wide range of potential experiments to nomena. Neural evidence suggests, however, explore implications. that the same dopaminergic reward circuitry An example of how consumption-driven of the brain in the midbrain (mesolimbic sys- and primary reinforcement from money can tem) is activated for a wide variety of differ- matter is asset pricing. Since Robert Lucas ent reinforcers (Montague and Berns 2002), (1978), many models of stock prices have including attractive faces (Itzhak Aharon et assumed that investors care about the utili- al. 2001), funny cartoons (Dean Mobbs et al. ty of consumption they can finance with 2003), cultural objects like sports cars stock market returns, rather than with (Susanne Erk et al. 2002), drugs (Schultz returns per se. Simple models of this sort 2002), and money (e.g., Hans Breiter et al. make many counterfactual predictions— 2001; Brian Knutson and Richard Peterson, most famously that the “equity premium,” in press; Delgado et al. 2000). This suggests or marginal return to stocks over bonds, that money provides direct reinforcement. would be much lower than it has actually Figure 4 is a rough guess about the neural been if investors only disliked risk because circuitry of reward (from Schultz 2002). It is of its impact on consumption, as conven- useful as a pictorial reminder that, while neu- tional models assume. Shlomo Benartzi and roscience (and our review) often emphasize Richard Thaler (1995) and Nicholas specific regions which are central in different Barberis, Tano Santos, and Ming Huang kinds of processing, the focus in thinking (2001) have had more success explaining about economic decisions should be on cir- returns patterns using a model in which cuitry or systems of regions and how they investors care directly about stock returns. interact. The diagram also shows how frontal This alternative assumption fits a brain that mr05_Article 1 3/28/05 3:25 PM Page 36

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Figure 4. Hypothesized neural circuitry of reward processing (Schultz 2000).

gets a kick out of earning high returns for plans are often sold as packages, making it their own sake. impossible to compute the cost of the indi- If gaining money provides direct pleasure, vidual components (hotel, food, transporta- then the experience of parting with it is tion). Often components of the package are probably painful. While there is no direct presented as “free” (like Microsoft’s internet evidence that paying is painful, the assump- browser) even though the claim is meaning- tion that paying hurts can explain many mar- less from an economic standpoint, given that ket phenomena which are otherwise the package is presented on a take-it-or- puzzling (Drazen Prelec and Loewenstein leave-it basis. One can interpret the appeal 1998). An example is the effect of payment- of ad-hoc currencies, such as frequent-flyer neutral pricing schemes on choices. miles, chips in casinos, or the beads used for Companies often go to great lengths to dis- incidental expenses at all-inclusive resorts guise payments, or reduce their pain. like Club Med, as an attempt to reduce the Consumers appear to oversubscribe to flat- pain-of-payment. The ad-hoc currency, rate payment plans for utilities and tele- whether miles or beads, feels like “play phone service and health clubs (Kenneth money,” and spending it does not seem to Train 1991; Train, Daniel McFadden, and exact the same psychic cost. Moshe Ben-Akiva 1987; Della Vigna and In experiments, we have observed a prefer- Ulrike Malmendier 2003, Anja Lambrecht ence for prepayment for certain items, even and Bernd Skiera 2004). A flat-rate plan where prepayment is financially irrational eliminates marginal costs and allows con- because it incurs an opportunity cost of lost sumers to enjoy the service without thinking interest payments (Prelec and Loewenstein about the marginal cost. Similarly, travel 1998). When questioned, respondents claim mr05_Article 1 3/28/05 3:25 PM Page 37

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to prefer prepayment for, e.g., a vacation trip experiments create a situation where the because then they could relax and enjoy the utility of food and disutility of work remain vacation more knowing it was paid up. It is an the same, but the amount of work-for- interesting question whether part of the reward goes up. This implies that it is possi- motive for owning rather than renting prod- ble to be motivated to take actions that bring ucts is precisely to create prepayment, and so no pleasure. enjoy consumption without being reminded of Berridge believes that the later stages of the cost. The pain-of-paying may also explain many drug addictions presents prototypical why we are willing to pay less for a product if examples of situations of what he terms paying in cash than by credit card. Although “wanting” without “liking”; drug addicts there are financial reasons to prefer paying by often report an absence of pleasure from credit-card, the size of credit card relative to taking the drugs they are addicted to, cou- cash premium that people reveal, in an exper- pled with an irresistible motivation to do so. iment, is much too high (up to 100 percent) to Other examples of situations in which there be rationalized by liquidity preference and often seems to be a disconnect between other economic considerations (Prelec and one’s motivation to obtain something and Duncan Simester 2001). the pleasure one is likely to derive from it are sex and curiosity (Loewenstein 1994). 4.4 Wanting and Liking Thus, for example, you can be powerfully Economists usually view behavior as a motivated to seek out information, even search for pleasure (or, equivalently, escape when you are quite certain that it will make from pain). The subfield of welfare econom- you miserable, and can feel quite unmotivat- ics, and the entire ability of economists to ed to engage in activities that, at a purely make normative statements, is premised on cognitive level, you are quite sure you would the idea that giving people what they want find deeply pleasurable. makes them better off. But, there is consid- Economics proceeds on the assumption erable evidence from neuroscience and that satisfying people’s wants is a good thing. other areas of psychology that the motivation This assumption depends on knowing that to take an action is not always closely tied to people will like what they want. If likes and hedonic consequences. wants diverge, this would pose a fundamen- Berridge (1996) argues that decision mak- tal challenge to standard welfare economics. ing involves the interaction of two separate, Presumably welfare should be based on though overlapping systems, one responsi- “liking.” But if we cannot infer what people ble for pleasure and pain (the “liking” sys- like from what they want and choose, then tem), and the other for motivation (the an alternative method for measuring liking “wanting” system). This challenges the fun- is needed, while avoiding an oppressive damental supposition in economics that one paternalism. only strives to obtain what one likes. 4.5 Cognitive Inaccessibility Berridge finds that certain lesions and phar- macological interventions can selectively The fact that people lack introspective enhance a rat’s willingness to work for a access to the sources of their own judg- food, without changing the pleasure of eat- ments of behavior, and tend to overattribute ing the food, as measured, admittedly some- both to controlled processes, has many what questionably, by the animal’s facial important implications for economics. expression (Animal facial expressions, like When it comes to discriminatory biases, for those of humans, provide at least a clue example, because people lack introspective about whether something tastes good, bad access to the processes that produce such or indifferent. In economic language, the biases, they are unable to correct for them mr05_Article 1 3/28/05 3:25 PM Page 38

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even when they are motivated to make choose one way or another. Paradoxically, this impartial judgments and decisions. Indeed, can be very beneficial. In many situations, an they are very likely to deny that they are action may be diagnostic of a good outcome, biased and, hence, likely to not even per- without having any significant ability to cause ceive the need for such correction. Such that outcome. For instance, participating in unconscious discrimination may explain some socially desirable activity (e.g., voting or why otherwise identical job application not littering) may be quite diagnostic of the resumes for candidates with statistically desired collective outcome (your candidate “white” rather than “African–American” winning, clean streets) without being able to names have a 50 percent higher chance of cause that outcome, because the impact of generating callbacks from job application your action is negligible. This gives rise to the letters, as shown recently by Marianne notorious “voter’s paradox” in rational choice Bertrand and Mullainathan (2004). It can theory, which seems to imply that no one also help explain why physicians are so con- should ever vote. Fortunately, the distinction vinced that gifts from pharmaceutical com- between diagnosticity and causality, which is panies do not bias their prescription absolute in the rational-choice model, is quite practices even though research (and the fuzzy psychologically. There is experimental continuing practice of gift giving by the evidence that people will cheat on their own companies) suggests that it does (Jason medical tests so as to “manufacture” a good Dana and Loewenstein 2003). diagnosis (George Quattrone and Amos A second class of implications is related to Tversky 1984), and their own personality the phenomena of apparent self-deception inventories, to yield a personality assessment and self-manipulation, where, for instance, diagnostic of success. This can only be possi- economic agents (investors, consumers, ble if the true motive for action — the desire entrepreneurs) are overly optimistic about to get “good news” — is hidden from the their chances for success. These phenomena agent at the moment of choice; if it were not have been richly catalogued by social psy- hidden, then awareness that the action was chologists, beginning with the research on taken precisely to get the good news would motivated cognition and cognitive disso- instantly void the diagnostic value of the nance in the 1950s. Neuroscience suggests action (see Ronit Bodner and Prelec 2003 for that they are all related to chronic cognitive an economic self-signaling model that allows inaccessibility of automatic brain processes. for noncausal motives on action). Cognitive Attention, for example, is largely controlled inaccessibility prevents this logical short-cir- by automatic processes, and attention in cuit and dramatically expands the range of turn determines what information we motives that can influence behavior. Because absorb. If attention is chronically drawn to the hedonic system (quadrant IV) is not con- information that is favorable to us, we will strained by logical considerations, a person emerge with an overoptimistic sense of our who takes a small step toward a larger virtu- abilities and prospects. It is a case of quad- ous objective, such as joining a gym to get fit, rants III and IV collaborating, without the or buying a copy of Stephen Hawking’s A “adult supervision” provided by quadrant I. Brief History of Time to feel scientifically lit- A third class of implications arises from the erate, may experience a feeling of pleasure cognitive inaccessibility of our own motives from the small step “as if” they have in fact for action. The fact that we are not con- secured their objective (which they most like- sciously aware of the moment of decision (as ly will not). At the same time, cognitive inac- shown by Libet’s research, mentioned in the cessibility means that quadrant I doesn’t have previous section) strongly suggests that we to acknowledge that the feeling of pleasure may also not understand the reasons why we was in fact the cause of his action. mr05_Article 1 3/28/05 3:25 PM Page 39

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5. Specific Economic Applications achieves this function in part by motivating individuals to take certain actions. In most ani- We now go into greater detail about rami- mals, emotions and drives motivate behaviors fications of neuroscience findings for four that have short-term goals, such as eating, specific topics in economics: intertemporal drinking, and copulating. As a result, the choice, decision making under risk and affective systems that we share with wide uncertainty, game theory, and labor-market range of other animals are inherently myopic. discrimination. Though some animals display far-sighted 5.1 Intertemporal Choice and Self-Control behaviors, such as storing food for winter, these are specialized, preprogrammed, behav- The standard perspective in economics iors that are distinctly different from the type views intertemporal choice as a trade-off of of spontaneous delay of gratification observed utility at different points in time. Individual in humans. Humans appear to be unique differences in the way that people make this among animals in terms of caring about, mak- tradeoff are captured by the notion of a dis- ing immediate sacrifices for, and flexibly count rate—a rate at which people discount responding to, desired future consequences. future utilities as a function of when they This capacity to take long-term conse- occur. The notion of discounting, however, quences of our behavior into account seems gained currency not because of any support- to be the product of our prefrontal cortex, ive evidence, but based only on its conven- which, tellingly, is the part of the brain that ient similarity to financial net present value is uniquely human (see, e.g., Manuck et al. calculations (Loewenstein 1992). Indeed, in 2003). Patients with damage to prefrontal the article that first proposed DU in detail, regions—most famously Phineas Gage, Samuelson (1937) explicitly questioned its whose injury led to a reformulation of our descriptive validity, saying “It is completely understanding of the function of the pre- arbitrary to assume that the individual frontal cortex—tend to behave myopically, behaves so as to maximize an integral of the paying little heed to the delayed conse- form envisaged in [the DU model].” quences of their behavior. As Hersh Shefrin In fact, more recent empirical research on and Thaler (1988) suggested many years ago, time discounting challenges the idea that intertemporal choice can be viewed as a people discount all future utilities at a con- splice of two processes—an impulsive, affec- stant rate (see Frederick, Loewenstein, and tive, process and a more far-sighted process O’Donoghue 2002). The notion of time dis- guided by the prefrontal cortex. counting, it seems, neither describes the Recent brain imaging research provides behavior of individuals nor helps us to classi- support for such an account. Samuel fy individuals in a useful fashion. How can an McClure et al. (2004) scanned subjects using understanding of the brain help us to estab- fMRI while they made a series of preference lish a better understanding of intertemporal judgments between monetary reward options choice behavior? Our two central distinc- that varied by amount and delay to delivery. tions, between affect and cognition, and For some pairs of choices, the earlier reward between automatic and controlled processes, would be received immediately; for others, both have important ramifications. both rewards were delayed (though one by 5.1.1 Affect and Cognition in Intertemporal more than the other). Consistent with the Choice idea that intertemporal choice is driven by two systems, one more cognitive and one As discussed above, the affective system is more deliberative, they found that parts of designed to ensure that certain survival and the limbic—i.e., affective—system associated reproduction functions are met and it with the midbrain dopamine system were mr05_Article 1 3/28/05 3:25 PM Page 40

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preferentially activated by options involving (low-load) were given a two-digit number that immediately available rewards. In contrast, they were instructed to memorize, and the regions of the lateral prefrontal cortex and other half (high load) were given a seven-digit posterior parietal cortex—typically viewed as number to memorize. Subjects were then more cognitive regions—were engaged uni- instructed to walk to another room in the formly by intertemporal choices irrespective building. On the way they passed by a table at of delay. Furthermore, the relative activity of which they were presented with a choice the two systems actually predicted the choic- between a caloric slice of cake or a bowl of es that subjects made: Greater relative activ- fruit salad. More than half (59 percent) chose ity in affective systems was associated with the cake in the high load (seven-digit) condi- choosing earlier rewards more often. tion, but only 37 percent chose the cake in the The notion of quasi-hyperbolic time dis- low load (two-digit number) condition. This counting, of course, provides a mathematical finding is consistent with the idea that the representation of precisely such a splicing of effort required to memorize seven-digit num- two processes, and has been shown to use- bers drew deliberative resources away from fully describe behavior in a wide range of self-control, leading those subjects who had domains. However, an understanding of the to remember more to eat more cake. neural underpinnings of these dual process- Second, prior exercise of self-control es allows for more nuanced predictions and seems to diminish the capacity and, hence, formulations. The notion of hyperbolic time- propensity to exert self-control in the present. discounting predicts that people will always Recall that the prefrontal cortex is the part of behave impulsively when faced with the the brain that is associated with a subjective right combination of incentives (typically feeling of effort. It is tempting to attribute those involving some immediate cost and this to the fact that self-control involves the benefit), but this does not seem to be the same part of the brain—the executive pre- case. Understanding that hyperbolic time frontal cortex—that is itself associated with discounting stems, in part, from competition feelings of mental effort. Perhaps this is why between the affective and cognitive systems, exercising willpower feels so difficult, and leads to the prediction that factors that why exercising self-control in one domain can strengthen or weaken one or the other of undermine its exercise in another, as demon- these influences will cause people to behave strated by a series of clever experiments con- more or less impulsively. ducted by Baumeister and colleagues (see, e.g., Baumeister and Kathleen Vohs 2003). In 5.1.2 Determinants of the Relative Strength a typical study, subjects on diets who resisted of Affect and Cognition temptation (by foregoing the chance to grab There are a variety of factors that affect the snacks from a nearby basket) later ate more relative strength of affective and cognitive ice cream in an ice-cream taste test and also influences on intertemporal choice which quit earlier when confronted with an intellec- can help to explain what could be called tual problem they couldn’t solve. They acted “intraindividual” variability in impatience. as if their ability to resist temptation was tem- First, any factor that increases the demands porarily “used up” by resisting the snacks (or, on the prefrontal cortex—on the controlled, alternatively, that they had “earned” a reward cognitive, system, should decrease the influ- of ice cream by skipping the tempting ence of this system and, hence, decrease indi- snacks). Other factors that seem to under- viduals’ control over their own behavior. This mine this self-control resource are alcohol, possibility was demonstrated by Baba Shiv stress, and sleep deprivation. and Alexander Fedorikhin (1999). To manip- Turning to the other side of the equation, ulate “cognitive load,” half of their subjects activation of affective states should, by the mr05_Article 1 3/28/05 3:25 PM Page 41

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same token, tend to accentuate temporal Tranel, and Damasio 1997; Damasio 1994) myopia. Indeed, there is considerable evi- lends further credence to this perspective, dence of such effects (Janet Metcalfe and as does research on psychopaths, who are Mischel 1999). Research has shown, for characterized by both emotional deficits example, that addicts display higher discount when it comes to imagining the future and rates, not only for drugs but also for money, by insensitivity to the future consequences when they are currently craving drugs than (as well as consequences to others) of their when they are not (Giordano et al. 2002). behavior (Hervey Cleckley 1941; Hare Other research has shown that sexual arousal 1965, 1966; David Lykken 1957). Whether produces greater time-discounting of money deliberately, as when one conjures up an rewards (Ariely and Loewenstein 2003). image of a “fat self” exposed on the beach, The main exceptions to the rule that affec- or without conscious intention, self-control tive states tend to engender short-sighted often involves an interaction of affective and behavior involve interactions between the cognitive mechanisms. cognitive and affective systems. In fact, deci- How might one model intertemporal sions to delay gratification often involve a choice differently as a result of the insights mixture of affect and cognition. They from neuroscience? First, the neuroscience require a cognitive awareness of the delayed research points to ways to “unpack” the con- benefits in delaying gratification—e.g., that cept of time preference. Clearly, ability to desisting from eating cake today will mean a think about future consequences is impor- more pleasing body type in the future. But, tant, which is probably why time preference as many researchers have observed, cogni- is correlated with measured intelligence tive awareness alone is insufficient to moti- (Mischel and Robert Metzner 1962). vate delay of gratification; emotions play a Second, because people are likely to make critical role in forward-looking decision myopic choices when under the influence of making. As Barlow (1988) notes, “The capac- powerful drives or emotions (Loewenstein ity to experience anxiety and the capacity to 1996), this suggests that a key to under- plan, are two sides of the same coin.” standing impulsivity in individuals might be Thomas Cottle and Stephen Klineberg to understand what types of situations get (1974), similarly argue that people care them “hot.” Third, we might be tempted to about the delayed consequences of their look for individual differences in what could decisions only to the degree that contem- be called “willpower”—i.e., the availability plating such consequences evokes immedi- of the scarce internal resource that allows ate affect. In support of this view, they cite people to inhibit viscerally driven behaviors the effects of frontal lobotomies which harm (see Loewenstein and O’Donoghue 2004 for areas of the brain that underlie the capacity a recent two-system model of intertemporal for images of absent events to generate choice and other economic behaviors). experiences of pleasure or discomfort. The A model of intertemporal choice that took neurosurgeons who performed these opera- account of interactions between affect and tions wrote of their frontal-lobotomy cognition can help to explain not only impul- patients that: “the capacity for imagination is sivity, but also why many people have self- still present, and certainly not sufficiently control problems of the opposite type of reduced to render the patients helpless, and those typically examined in the literature— affective responses are often quite lively, e.g., tightwads who can’t get themselves to [but there is] a separation of one from the spend enough; workaholics who can’t take a other” (Freeman and Watts 1942). break, and people who, far from losing con- The work of Damasio and colleagues dis- trol in the bedroom, find themselves frus- cussed earlier (Bechara, Damasio, Daniel tratingly unable to do so. All of these patterns mr05_Article 1 3/28/05 3:25 PM Page 42

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of behavior can easily be explained by the subjects to choose whether to eat a fancy possibly uniquely human propensity to expe- French Restaurant dinner in one month or rience emotions, such as fear, as a result of two, and others to choose between the thinking about the future. Indeed, it is likely sequence [fancy French this month, eat at that one of the main tools that the prefrontal home next month] or the same choice in cortex uses to impose self-control when reverse order. A majority of subjects preferred affective forces would otherwise favor short- the isolated French dinner earlier but sighted self-destructive behavior is to create deferred the French dinner when it was “deliberative affect” via directed imagery and embedded in a sequence with eating at home. thought (Roger Giner-Sorolla 2001). Frederick and Loewenstein (2000) conducted Such a framework might also help to a study in which subjects were presented with explain why people appear so inconsistent a series of intertemporal choices that were when their behavior is viewed through the framed in ways intended to evoke different lens of discounted utility. The ability to think considerations. For example, in one version about future consequences may not be they asked respondents to allocate pleasurable strongly correlated with the degree to which outcomes, such as massages, over time. They different experiences produce visceral reac- expected, and found, that the allocation for- tions, and these in turn might not be corre- mat evoked a choice heuristic that caused peo- lated with an individual’s level of willpower. ple to spread consumption relatively evenly Indeed, Loewenstein et al. (2001) found over time, implying a preference for flat close to zero correlations between numerous sequences. In another version, they asked behaviors that all had an important intertem- respondents to state a maximum buying price poral component, but much higher correla- for the Greek-then-French and French-then- tions between behaviors that seemed to Greek sequences, rather than choose between draw on the same dimension of intertempo- them, anticipating that the mention of money ral choice—e.g., which required suppression would evoke considerations of the time value of specific emotions such as anger. of money and, hence, cause subjects to place higher value on the option that provided 5.1.3 Automatic Processes in Intertemporal greater value earlier—i.e., the declining Choice sequences—which is what they found.20 To the extent that intertemporal choice is, in fact, driven by cognitive considerations, much of this cognition does not take the usu- 20 Another phenomenon that may be driven by such ally assumed form of a weighing of costs and automatic processes is the “diversification bias” (Itamar Simonson 1989). When people choose several alternatives benefits discounted according to when they from a set, they choose more variety when they choose occur in time. Rather, consistent with the ear- them all simultaneously than when they choose them lier claim that people often make decisions via sequentially. This phenomenon has been demonstrated with snack food, audio pieces, gambles, and lottery tick- a two-part process that takes the form of first ets. Daniel Read and Loewenstein (1995) tested various asking “what situation am I in?” then continu- explanations for overdiversification (e.g., they diversify in ing “how does one behave in such a situation,” simultaneous choice to gather information), but concluded that it results from a rule of thumb that that they apply much intertemporal choice is driven by auto- whenever choices are expressed in a fashion that high- matic processes involving pattern-matching, lights diversification (see also Thomas Langer and Craig recognition, and categorization. Fox 2004). This viewpoint is supported by a study (Read, Loewenstein, and S. Kalyanaraman 1999) in which sub- A pattern of choice that seems to be driven jects make successive choices between groups of objects by such a process is the preference for which are easily categorized or not. When categorization sequences of outcomes that improve over was easy (e.g., virtues and vices), subjects diversified more in simultaneous than in sequential choice. When time. In one demonstration of this effect, there were multiple competing categorizations, the Loewenstein and Prelec (1993) asked some overdiversification bias disappeared. mr05_Article 1 3/28/05 3:25 PM Page 43

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In sum, neuroscience points to some defi- it comes to risks; we drive (or wish we were ciencies in the way that economists currently driving as we sit white-knuckled in our air- model intertemporal choice and also suggests plane seat) when we know at a cognitive level directions for future modeling. A somewhat that it is safer to fly. We fear terrorism, when stylized interterpretation of the results just red meat poses a much greater risk of mor- reviewed would be that some intertemporal tality. And, when it comes to asking someone decisions are, in fact, well represented by the out on a date, getting up to speak at the podi- discounted utility model—specifically those um, or taking an important exam, our delib- involving detailed deliberation but minimal erative self uses diverse tactics to get us to affect. However, a wide range of other take risks, or to perform in the face of risks, intertemporal choices are influenced by that our visceral self would much prefer to affectively “hot” processes such as drives and avoid. Perhaps the most dramatic illustra- emotions, or result from processes that auto- tions of the separation of visceral reactions matically evoke a response which depends on and cognitive evaluations, however, comes the situation. Models which focus on how from the phobias that so many people suffer these discrepant processes interact are prom- from; the very hallmark of a phobia is to be ising (e.g., Bernheim and Rangel 2004; unable to face a risk that one recognizes, Loewenstein and O’Donoghue 2004). objectively, to be harmless. Moreover, fear unleashes preprogrammed sequences of 5.2 Decision-Making under Risk and behavior that aren’t always beneficial. Thus, Uncertainty when fear becomes too intense it can pro- Both collaboration and competition duce counterproductive responses such as between affect and cognition, and between freezing, panicking, or “dry-mouth” when controlled and automatic processes, can also speaking in public. The fact that people pay be seen in the domain of decision making for therapy to deal with their fears, and take under risk and uncertainty. drugs (including alcohol) to overcome them, can be viewed as further “evidence” that peo- 5.2.1 Affect versus Cognition ple, or more accurately, people’s deliberative The expected utility model views decision selves, are not at peace with their visceral making under uncertainty as a tradeoff of reactions to risks. utility under different states of nature—i.e., 5.2.2 Affective Reactions to Uncertainty different possible scenarios. But, much as they do toward delayed outcomes, people A lot is known about the neural processes react to risks at two different levels. On the underlying affective responses to risks. one hand, as posited by traditional econom- Much risk averse behavior is driven by ic theories and consistent with quadrant I of immediate fear responses to risks, and fear, table 1, people do attempt to evaluate the in turn, seems to be largely traceable to the objective level of risk that different hazards amygdala. The amygdala constantly scans could pose. On the other hand, and consis- incoming stimuli for indications of potential tent with quadrant IV, people also react to threat and responds to inputs both from risks at an emotional level, and these emo- automatic and controlled processes in the tional reactions can powerfully influence brain. Patrik Vuilleumier et al. (2001) their behavior (Loewenstein, Weber, observed equivalent amygdala activation in Christopher Hsee, and Ned Welch 2001). response to fearful faces that were visually The existence of separate affective and attended to or in the peripheral region which cognitive systems that respond differently to falls outside of conscious perception (cf. de risks is most salient when the two systems Beatrice de Gelder, Jean Vroomen, Gilles clash. People are often “of two minds” when Pourtois, and Lawrence Weiskrantz 1999; mr05_Article 1 3/28/05 3:25 PM Page 44

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Nouchine Hadjikhani and de Gelder 2003; and affective systems) and normal subjects LeDoux 1996; John Morris, C. Buchel, and chose a sequence of cards from four decks Raymond Dolan 2001; Whalen et al. 1998). whose payoffs the subjects only learned from But the amygdala also receives cortical experience (a “multiarmed bandit” prob- inputs, which can moderate or even override lem). Two decks had more cards with its automatic quadrant IV response. extreme wins and losses (and negative In a paradigmatic experiment that illus- expected value); two decks had less extreme trates cortical overriding of amygdala activa- outcomes but positive expected value. Both tion (LeDoux 1996), an animal such as a rat groups exhibited similar skin conductance is “fear-conditioned”—by repeatedly admin- (sweating—an indication of fear) after large- istering a signal such as a tone followed by loss cards were encountered, but, compared administration of a painful electric shock. to normals, prefrontal subjects rapidly Once the tone becomes associated in the returned to the high-paying risky decks after animal’s mind with the shock, the animal suffering a loss and, as a result, went “bank- responds to the tone by jumping or showing rupt” more often. Although the immediate other over signs of fear. In the next phase of emotional reaction of the prefrontal patients the experiment, the tone is played repeated- to losses was the same as the reaction of nor- ly without administering the shock, until the mals (measured by skin conductance), the fear response becomes gradually “extin- damaged patients apparently do not store guished.” At this point, one might think that the pain of remembered losses as well as nor- the animal has “unlearned” the connection mals, so their skin conductance rose much between the tone and the shock, but the less than normals when they resampled the reality is more complicated and interesting. high risk decks. Subsequent research found a If the neural connections between the cortex similar difference between normal subjects and the amygdala are then severed, the orig- who were either high or low in terms of emo- inal fear response to the tone reappears, tional reactivity to negative events. Those which shows that fear conditioning is not who were more reactive were more prone to erased in “extinction” but is suppressed by sample from the lower-paying, safer decks of the cortex and remains latent in the amyg- cards (Peters and Slovic 2000). dala. This suggests that fear learning may be Damasio et al.’s research shows that permanent, which could be an evolutionarily insufficient fear can produce nonmaximiz- useful adaptation because it permits a rapid ing behavior when risky options have nega- relearning if the original cause of the fear tive value. But, it is well established that reappears. Indeed, other studies (reported fear can also discourage people from taking in the same book) show that fear-condition- advantageous gambles (see, e.g., Uri ing can be reinstated by the administration Gneezy and Jan Potters 1997). Indeed, Shiv of a single shock. et al. (2005) found that frontal patients Decision making under risk and uncer- actually make more money on a task in tainty, like intertemporal choice, nicely illus- which negative emotions cause normal sub- trates both collaboration and competition jects to be extremely risk averse: a series of between systems. When it comes to collabo- take-it-or-leave-it choices to play a gamble ration, risk taking (or avoiding) behavior with a 50 percent chance of losing $1.00 or involves an exquisite interplay of cognitive gaining $1.50. Normal subjects and frontal and affective processes. In a well-known subjects were about equally likely to play study that illustrates such collaboration the gamble on the first round, but normals (Bechara et al. 1997), patients suffering pre- stopped playing when they experienced frontal damage (which, as discussed above, losses, while frontal patients kept playing. produces a disconnect between cognitive Clearly, having frontal damage undermines mr05_Article 1 3/28/05 3:25 PM Page 45

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the overall quality of decision making; but et al. 2002) which corroborates the subjects’ there are situations in which frontal damage self-reports. Using fMRI, Ming Hsu et al. can result in superior decisions. (2005) found frontal insula and amygdala At a more macro level, emotional reac- activation when subjects faced ambiguous tions to risk can help to explain risk-seeking choices, compared to risky ones. They also as well as risk-aversion (Caplin and Leahy found that patients with orbitofrontal corti- 2001). Thus, when gambling is pleasurable, a cal (OFC) lesions are ambiguity-neutral, model that incorporates affect naturally pre- compared to brain-damaged controls. Since dicts that people will be risk-seeking and the OFC receives input from the limbic sys- that self-control will be required to rein in tem (including the insula and amygdala), the risk-taking. Indeed, about 1 percent of the fMRI and lesion evidence together imply people who gamble are diagnosed as “patho- that in normal subjects, ambiguous gambles logical”—they report losing control, “chasing often create discomfort or fear which is losses,” and harming their personal and work transmitted to the OFC. Ironically, patients relationships by gambling (National with OFC brain damage therefore behave Academy of Sciences 1999). The standard more “rationally” (treating ambiguous and economic explanations for gambling—con- risky gambles similarly) than normals, a vex utility for money or a special taste for the reminder that logical principles of rationality act of gambling—don’t help explain why and biological adaptations can be different some gamblers binge and don’t usefully (cf. Shiv et al. 2005). inform policies to regulate availability of 5.2.3 Automatic Versus Controlled gambling. Neuroscience may help. Processes Pathological gamblers tend to be over- whelmingly male and tend to also drink, The divergence between different sys- smoke, and use drugs much more frequent- tems’ evaluations of risk can also be seen ly than average. Genetic evidence shows that when it comes to judgments of probability. a certain gene allele (D2A1), which causes Numerous studies by psychologists have gamblers to seek larger and larger thrills to observed systematic divergences between get modest jolts of pleasure, is more likely to explicit judgments of probability in different be present in pathological gamblers than in settings (presumably the product of con- normal people (David Comings 1998). One trolled processing) and implicit judgments study shows tentatively that treatment with or judgments derived from choice (which naltrexone, a drug that blocks the operation are more closely associated with automatic of opiate receptors in the brain, reduces the processing and/or emotion). For example, urge to gamble (e.g., Paula Moreyra et al. Kirkpatrick and Epstein (1992) found that 2000). The same drug has been used to suc- people prefer to draw a bean from a bowl cessfully treat “compulsive shopping” (Susan containing ten winning beans and ninety McElroy et al. 1991). losing beans than from a bowl containing Neural evidence also substantiates the dis- one winning bean and nine losing beans (see tinction between risk (known probability) also Veronika Denes-Raj, Epstein, and and “Knightian” uncertainty, or ambiguity. Jonathon Cole 1995; Paul Windschitl and Subjects facing ambiguous gambles—know- Gary Wells 1998). Subjects say that they ing they lack information they would like to know the probabilities of winning are the have about the odds—often report a feeling same, but they still have an automatic quad- of discomfort or mild fear. Brain imaging rant III preference for the bowl with more shows that different degrees of risk and winning beans. uncertainty activate different areas of the An important feature of good probability brain (McCabe et al. 2001; Aldo Rustichini judgment is logical coherence: probabilities mr05_Article 1 3/28/05 3:25 PM Page 46

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of mutually exclusive and exhaustive events whether any theory that fails to incorporate should add to one, and conditional probabil- the affective dimensions of risk will be capa- ities should be linked to joint and marginal ble of shedding much light on such important probability according to Bayes rule phenomena as stock market booms and busts, (P(A|B)=P(A and B)/P(B)). Logical coher- the ubiquity of gambling (e.g., slot machines ence is violated in at least two neurally revenues dwarf revenues from movies), and interesting ways. One is “conjunction falla- the vicissitudes of public responses to threats cy”—the tendency to judge events with two as diverse as terrorism and global warming. components A and B as more likely than A 5.3 Game Theory or B alone. While most subjects (even statistically sophisticated ones) make conjunction Neuroscientific data are well-suited to errors on some problems, when those errors exploring the central assumptions on which are pointed out, quadrant I wakes up, and game theory predictions rest. These assump- the subjects sheepishly recognize the error tions are that players: (1) have accurate and correct it (Kahneman and Frederick beliefs about what others will do (i.e., play- 2002). For example, the famous “Linda” ers are in equilibrium); (2) have no emotions problem describes an earnest young politi- or concern about how much others earn (a cally minded student. In one condition, sub- useful auxiliary assumption); (3) plan ahead; jects are asked to rank statements about and (4) learn from experience. Linda—Is she a bank teller? A feminist bank 5.3.1 Theory of Mind and Autism teller? A large majority of subjects, even highly educated ones, say Linda is more In strategic interactions (games), knowing likely to be a feminist bank teller than she is how another person thinks, and how anoth- to be a bank teller, a violation of the con- er person thinks you think, etc., is critical to junction principle. But when subjects are predicting the other person’s behavior (and asked, “Out of one hundred people like for inferring the other player’s intentions, Linda, how many are bank tellers? Feminist which underlie emotional judgments of fair- bank tellers?” conjunction errors disappear ness and obliged reciprocity in more mod- (Tversky and Kahneman 1983). ern theories (e.g., Rabin 1993). From a Another violation is that subjects often neural view, iterated strategic thinking con- report probabilities which are logically inco- sumes scarce working memory and also herent. fMRI evidence suggests an explana- requires a player to put herself in another tion for why probability judgments are player’s “mind.” There may be no generic incoherent, but can be corrected upon human capacity to iterate this kind of think- reflection: when guessing probabilities, the ing beyond a couple of steps.21 Studies that left hemisphere of the brain is more active; examine either subject’s choices, or that but when answering logic questions, the monitor what type of information subjects right hemisphere is more active (Lawrence look up or pay attention to in experimental Parsons and Daniel Osherson 2001). Since games, suggest only one–two steps of strate- enforcing logical coherence requires the gic thinking are typical in most populations right hemisphere to “check the work” of the (e.g., Eric Johnson et al. 2002; Miguel left hemisphere, there is room for slippage. Costa-Gomes et al. 2001; Camerer, Teck Once again, it can be seen that neuro- Ho, and Kuan Chong 2004), though up to science, and specifically, a consideration of affective and automatic processes that have 21 been largely neglected by economists, could Of course, equilibration might occur through a process other than introspection—e.g., adaptive learning, potentially inform an important line of imitation, communication, or evolution. But these processes research and theory. We are skeptical of must have a neural basis too. mr05_Article 1 3/28/05 3:25 PM Page 47

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three–four steps are observed in analytically Ironically, while the subject’s reasoning skilled and specially trained populations. matches exactly how conventional game As discussed in section 4.2, many neuro- theory approaches the game, it also sounds scientists believe there is a specialized autistic, because this subject is surprised “mind-reading” (or “theory of mind”) area, and perplexed by how normal people perhaps in prefrontal area Brodmann 10, behave. which generates reasoning about what oth- This anecdote is complemented by ers believe and might do (e.g., Simon Baron- Elizabeth Hill and David Sally’s (2003) Cohen 2000).22 Autism is thought to be a extensive comparison of normal and autistic deficit in this area (and related circuitry). children and adults playing ultimatum People with autism often have trouble figur- games. Nearly half of the autistic children ing out what other people think and believe, offer zero or one unit (out of ten) in the ulti- and are consequently puzzled by behavior matum game, and relatively few offer half. that most people would consider normal. Many autistic adults also offered nothing, One tool used in behavioral game theory is but a large number of autistic adults offered the “ultimatum game.” In this game, a “pro- half—as if they had developed a reasoning poser” offers a division of a sum of money, or experiential workaround which tells generically $10.00, to another “responder” them what other people think is fair in who can accept or reject it, ending the game. games that involve sharing, even though If the responder has no emotional reaction they cannot guess what others will do using to the fact that the proposer is earning more normal circuitry. than she is (“envy” or “disgust”), then the McCabe et al. (2001) used fMRI to meas- responder should accept the smallest offer. ure brain activity when subjects played If the proposer also has no emotional reac- games involving trust, cooperation, and pun- tion to earning more (“guilt”) and anticipates ishment. They found that players who coop- correctly what the responder will do, then erated more often with others showed the proposer should offer the lowest increased activation in Brodmann area 10 amount. This pattern is rarely observed: (thought to be one part of the mind-reading Instead, in most populations the proposer circuitry) and in the thalamus (part of the offers 40–50 percent and about half the emotional “limbic” system). Players who responders reject offers less than 20 percent. cooperated less often showed no systematic When players do follow the dictates of activation. game theory, the result can be a low payoff Bhatt and Camerer (in press) used fMRI and confusion. Consider this quote from an to compare brain activity when subjects upset subject, an Israeli college student, make choices and express beliefs in matrix whose low offer in a $10.00 ultimatum game games. They found that when players were was rejected (from Shmuel Zamir 2000): in equilibrium (choices were best-responses and beliefs were accurate), the same circuit- I did not earn any money because all the other ry was being used when making a choice players are stupid! How can you reject a positive and expressing a belief. This means equilib- amount of money and prefer to get zero? They just did not understand the game! You should rium is a “state of mind,” which can be iden- have stopped the experiment and explained it to tified by a tight overlap in activity in the two them . . . tasks, as well as a mathematical restriction on best response and belief accuracy. They also found evidence suggesting that, when subjects guessed what beliefs other subjects 22 Grether et al. (2004) also find BA 10 activity, along with interesting activity in anterior cingulate and the basal had about their own behavior, they tended forebrain, as subjects bid in second-price auctions. to anchor on their own choices. This means mr05_Article 1 3/28/05 3:25 PM Page 48

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beliefs about beliefs are not just iterations Ernst Fehr and Simon Gachter 2000; of some belief processing mechanism; Camerer 2003). The fact that unfair offers instead, self-referential beliefs use compo- activate insula means that a verbal statement nents of circuitry for forming beliefs and for like “I am so disgusted about being treated making choices. that way” is literal, not metaphorical—they really do feel disgusted.24 5.3.2 Emotions and Visceral Effects Zak et al. (2003) explored the role of hor- One of the most striking neuroscientific mones in trust games. In a canonical trust findings about game theory comes from game, one player can invest up to $10.00, Sanfey et al.’s (2003) fMRI study of ultima- which is tripled. A second “trustee” player tum bargaining. By comparing the brains of can keep or repay as much of the tripled subjects responding to unfair ($1.00–$2.00 investment as they want. Zak et al. measured out of $10.00) and fair ($4.00–5.00) offers, eight hormones at different points in the they found that very unfair offers differen- trust game. The hormone with the largest tially activated three regions: Dorsolateral effect was oxytocin—a hormone that rises prefrontal cortex (DLPFC), anterior cingu- during social bonding (such as breast-feed- late (ACC), and insula cortex (see Figure 4). ing and casual touching). They found that DLPFC is an area involved in planning. The oxytocin rose in the trustee if the first player insula cortex is known to be activated during “trusts” her by investing a lot. (They also the experience of negative emotions like found that ovulating women were particular- pain and disgust. ACC is an “executive func- ly untrustworthy—they did not repay as tion” area which often receives inputs from much of the investment.) many areas and resolves conflicts among Roxanna Gonzalez and Loewenstein them.23 Therefore, it appears that, after an (2004) examined the impact of circadian unfair offer, the brain (ACC) struggles to rhythms in a repeated trust (centipede) resolve the conflict between wanting to game. They sorted people into “morning” accept the money because of its planned and “night” people (which can be done reward value (DLPFC) and disliking the rather reliably) and had them play a cen- “disgust” of being treated unfairly (insula). tipede game when they were on- or off-peak In fact, whether players reject unfair (e.g., the morning people were off-peak offers or not can be predicted rather reliably when playing in the evening). Based on prior (a correlation of 0.45) by the level of their research showing that sleep-cycle affects insula activity. It is irresistible to speculate emotional regulation—i.e., people’s ability to that the insula is a neural locus of the distaste suppress or avoid acting on unwanted feel- for inequality or unfair treatment posited by ings—they predicted and found much lower models of social utility, which have been suc- levels of cooperative behavior when people cessfully used to explain many varying pat- played at off-peak times. terns in experiments — robust ultimatum Tania Singer et al. (2004) report an impor- rejections, public goods contributions, and tant link between reward and behavior in trust and gift-exchange (e.g., Bazerman, games. They played repeated prisoners’ Loewenstein, and Leigh Thompson 1989; dilemma games in which one player, in the fMRI scanner, faced a series of opponents.

23 The ACC also contains a large concentration of “spindle cells”—large neurons shaped like spindles, 24 It also suggests an intriguing follow-up experiment which are almost unique to human brains (Allman et al. that no previous theory would have predicted—patients 2002). Loosely speaking, these cells are probably impor- with damage to their insula regions should feel no disgust tant for many of the activities which distinguish humans and accept low offers, unless those patients have devel- from our primate cousins, particularly language, and oped a “workaround” or alternative method to “feel” complex decision making. unfairness in nonvisceral terms. mr05_Article 1 3/28/05 3:25 PM Page 49

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Figure 5. Coronal slices showing regions which are differentially active after an unfair offer ($1–2 out of $10), relative to activity after a fair off ($4–5). Regions are anterior cingulate (ACC), right and left insula, and dorsolateral prefrontal cortex (DLPFC). See Sanfey et al. (2003).

The scanned subject was told that some and reasoning ability, might legitimately vary opponents cooperated intentionally (i.e., with these biological factors. The theory is they could choose freely) while others coop- easily patched by inserting variables, like “an erated, but unintentionally. Afterwards, sub- envy/disgust coefficient,” which depends on jects were shown different faces of those some biological state. But game theory also they had played against. The faces of the assumes that players will recognize the state- intentional cooperators activated insula, dependence in others and adjust their guess- amygdala, and ventral striatal areas (among es about how other people will play. We have others). Since the striatum is an all-purpose no idea if they can, and it is likely that people reward area, activation in that region means are generally limited at simulating emotional that simply seeing the face of a person who states of others (see Leaf van Boven, intentionally cooperated with you is reward- Loewenstein, and David Dunning 2003). ing. In game theory terms, a person’s “repu- Cognitive inaccessibility also implies that tation” in a repeated game is a perception by people may not fully understand the influ- other players of their “type” or likely behav- ence of exogenous changes in visceral ior based on past play. Singer et al.’s results states on their own behavior. For example, mean that a good reputation may be neural- if being trusted produces oxytocin, then ly encoded in a way similar to beautiful or when oxytocin surges for exogenous rea- other rewarding stimuli. sons—from a relaxing massage, or when The facts that insula activity, oxytocin lev- synthetic oxytocin is administered—the els, and sleep cycles affect behavior in games, brain might misread this surge in oxytocin and that cooperators’ faces “feel beautiful,” as a sign of being trusted and react accord- does not “disprove” game theory, per se, ingly (e.g., by acting in a more reciprocal because preferences for different outcomes, trustworthy way). mr05_Article 1 3/28/05 3:25 PM Page 50

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5.3.3 Backward Induction Levine 1998; George Mailath 1998). Since many types of learning rules have been pro- A central principle in game theory is posed, fitting rules to data from experiment “backward induction” in extensive-form has proved useful in showing when intuitive- (“tree”) games that are played over time. ly appealing rules might fit badly, and sug- Backward induction means figuring out what gesting improvements to those rules (e.g., to do today by and reasoning how others will Camerer 2003). Camerer and Ho (1999) behave at all possible future points and showed that both simple reinforcement of working backward. Behavioral evidence, and chosen strategies, and learning by updating direct evidence from measuring where play- beliefs about other players, are really two ers look on a computer screen, shows that polar opposite types of generalized rein- people have trouble doing more than a cou- forcement learning in which strategies have ple of steps of backward induction (e.g., numerical propensities or attractions which Johnson et al. 2002). However, Johnson et al. are adjusted over time by experience. also found that, when players were briefly In neural terms, the Camerer–Ho theory instructed about how to do backward induc- can be interpreted as a splice of two process- tion, they could learn to do it rapidly and es—a rapid, emotional process in which a with little effort (total response times were chosen strategy is quickly reinforced by the similar to in pre-instruction trials). This is a gain or loss that resulted and a slower delib- reminder, in the game theory context, of the erative process that requires players to cre- important distinction between controlled ate counterfactuals about how much they and automatic behavior stressed in section 3 would have earned from other strategies that above. Initially, subjects look automatically were not chosen. Conventional reinforce- at early periods and hardly notice future ment learning neglects the second process. periods they realize (correctly, in a statistical “Fictitious play” belief learning assumes the sense) are unlikely to occur. However, with second process completely overrides the instruction and practice, backward induction first. A parameter in the theory which repre- quickly becames automated, yielding fast sents the relative strength of the second responses and few errors. process, compared to the first, is usually Economists are naturally inclined to estimated to be between zero and one. This model cognition in terms of costs and bene- implies that reinforcement is stronger, but fits. If forced into this framework, backward both processes are at work. induction would probably be characterized Michael Platt and Paul Glimcher (1999) as cognitively costly. But the fact that it is found corroborating evidence for reinforce- easily learned and automated suggests the ment learning of the first, rapid-process sort costs of backward induction has a special in single-neuron recording in monkey pari- structure— at first, it is unnatural (not spon- etal cortex. They measured neuron firing taneously intuited by subjects), like a piece rates in advance of choices in a game of software not yet installed; but once between a monkey and a computerized installed, it is cheap to run. opponent. They found that firing rates are 5.3.4 Learning closely related to the average reinforcement received for that choice in the last ten trials. The idea that a game-theoretic equilibri- Dominic Barraclough, Michelle Conroy, and um resulted from learning, imitation, or evo- Daeyeol Lee (2004) found similar evidence lution, rather than simple introspection, has of “learning neurons” in dorsolateral pre- led to a large literature on what results in the frontal cortex of rhesus monkeys; their long-run from different types of learning parameter estimates of learning models also models (e.g., Drew Fudenberg and David supports the two-process Camerer–Ho mr05_Article 1 3/28/05 3:25 PM Page 51

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Before EV Cue After Cue per second Action Potentials

Relative Expected Value

Figure 6. ( from Glimcher et al., in press). The left graph (“before EV cue”) shows the LIP neuron firing rate (y axis) plotted against the relative expected value of one of two possible reward-producing locations. The right graph (“after cue”) shows the firing rate after the monkey learns which movement is rewarding.

theory.25 Gathering neural evidence from theory. Strategic thinking is likely to require humans (to see whether a second, delibera- specialized circuitry and iterated strategic tive process is being used as the parametric reasoning is likely to be bounded (as indicat- estimates suggest) is feasible and could ed by ample behavioral data). Early studies prove insightful. suggest hormones and biological factors Figure 6 illustrates the behavior of (such as circadian rhythyms) play a role in Glimcher’s parietal neurons in a task with social preferences like trust. Thinking about two targets of different expected value. The the brain—and some experimental facts— left graph shows the actual firing rates (on also suggest that logical principles like back- the y axis) plotted against the expected ward induction may be neurally unnatural reward value of the target before the “best” and that learning processes are likely to be a target is revealed. The correspondence is splice of cognitive and affective processes. At remarkably close—these neurons are encod- the same time, single-neuron monkey meas- ing expected value. The righthand graph urement suggests that expected-value com- shows that, after the winning target is putation and reinforcement learning may revealed (so that the expected value is no control behavior in highly adapted tasks. The longer relevant), the firing rates increase to emerging picture is one in which the simplest close to their maximum capacity. elements of game theory, like keeping track In sum, neuroscience provides some new of what has worked in a mixed-equilibrium ways to think about central elements of game game with limited scope for outguessing one’s opponent, may be alive and well in the brain, while higher-order cognition and affective 25 They estimate two reinforcements: When the mon- influence on social preferences depart from keys choose and win (reinforcement by 1), and when they the standard ideas we teach our students. choose and lose ( 2). In their two-strategy games, the model is equivalent to one in which monkeys are not reinforced for losing, but the unchosen strategy is reinforced 5.4 Labor-Market Discrimination by 2. The fact that 2 is usually less than 1 in magnitude (see also Lee et al., in press) is equivalent to 1 in the Our last specific application is labor-mar- Camerer–Ho theory. ket discrimination. Economic models assume mr05_Article 1 3/28/05 3:25 PM Page 52

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that labor-market discrimination against As the name suggest, the implicit associa- minorities is either a taste (a distaste for tion test taps into “implicit,” as opposed to working with minorities, or a distaste passed “explicit,” attitudes. One can think of on from customers), or a belief that minority implicit attitudes, roughly, as those associat- workers are less productive (for example, a ed with automatic processing, whereas belief that minority status is a proxy for unob- explicit attitudes are associated with con- servable differences in skill, also known as scious, controlled, processing. New meth- “statistical discrimination”). ods developed by psychologists, such as the Neuroscience suggests a different answer. IAT, have begun to reveal that implicit and Automaticity contributes to discrimination explicit attitudes can sometimes diverge because neural networks rapidly spread acti- from one-another, with implicit attitudes, in vation through associated concepts and some cases, exerting a more reliable influ- stereotypes. Affect contributes to discrimina- ence on behavior. Thus, in one recent study, tion because automatic affective reactions Allen McConnell and Jill Leibold (2001) have such a powerful effect on cognitive judg- administered the IAT to subjects, had them ments. Discrimination in this view involves complete measures of explicit attitudes rapid, automatic, associations between social toward blacks and whites, and also had them categories, stereotypes, and affect. interact with two experimenters, one black Such an account receives support from and the other white. Coders blind to either remarkable experiments that demonstrated the implicit or explicit measures then coded subtle “implicit associations” between demo- the subjects’ interactions with the experi- graphic categories and good or bad adjectives menters, including such objective measures (try it out on yourself at http:// as how closely the subject moved their chair buster.cs.yale.edu/implicit/). Subjects taking to the experimenter, and the experimenter this computer-administered implicit associa- also rated their perception of the prejudice tion test (IAT) are shown a mixed up series of of the subject. Although the experimenters stereotypically black or white names (Tyrone ratings of the subjects’ degree of prejudice or Chip) and positive or negative adjectives correlated with both explicit (r = 0.33, p (mother or devil). They are asked to tap one 0.05) and implicit (r = 0.39, p 0.05) meas- key when they see one type of name or adjec- ures, the other behavioral measures of bias tive, and a different key if they see the other that correlated with either the IAT or self- type of name or adjective, at which point the reports of prejudice (these were: coders’ computer moves on to the next name or adjec- overall ratings, speaking time, smiling, tive. The dependent variable is how long it speech errors, speech hesitation, and extent takes the subject to work their way through of extemporaneous social comments) all the complete list of names and adjectives. correlated with the IAT but not with the White subjects work their way through the list explicit measures of prejudice. much more quickly when one key is linked to Implicit attitudes have also been linked to the pair (black or negative) and the other to neural processing. In one study (Elizabeth (white or positive) than they are when one key Phelps et al. 2000), researchers adminis- is linked to [black or positive] and the other to tered the IAT to Caucasian subjects and also [white or negative]. What’s going on? The asked them explicit questions about their brain encodes associations in neural networks, attitudes toward African–Americans. Then which spread activation to related concepts. they scanned the subjects’ brains with fMRI For white students, black names are instantly while exposing them to photographs of unfa- associated with negative concepts, whether miliar black and white males, and focusing they realize it or not, because the association specifically on a subcortical structure in the is automatic (rapid and unconscious). brain called the amygdala, which numerous mr05_Article 1 3/28/05 3:25 PM Page 53

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studies have linked to processing of fear. other than prices and choice sets so it is a They found that the relative strength of stretch to think of them of as conventional amygdala activation to black as compared tastes or beliefs. with white faces was correlated with the IAT measure of implicit attitudes, but not with 6. Conclusions direct, conscious, expression of race attitudes. (A study by Hart et al. (2000) suggests Economics parted company from psychol- the effect is roughly symmetric for black ogy in the early twentieth century. subjects seeing white faces.) Furthermore, Economists became skeptical that basic psy- the same pattern was not observed when the chological forces could be measured without black and white faces were well known, pos- inferring them from behavior (the same posi- itively regarded, celebrities (such as Michael tion “behaviorist” psychologists of the 1920s Jordan and Denzel Washington). People reached), which led to adoption of the useful hold implicit attitudes involving not only tautology between unobserved utilities and race, but also a wide range of other individ- observed (revealed) preferences. But ual characteristics, such as height, weight, remarkable advances in neuroscience now attractiveness, religion, and national origin, make direct measurement of thoughts and and, like race, many of these attitudes feelings possible for the first time, opening undoubtedly have real economic conse- the “black box” which is the building block of quences. Thus, although most people reject any economic interaction and system—the height and attractiveness as indicators of human mind. marginal productivity, taller and more attrac- Most economists are curious about neuro- tive people are more likely to earn higher science, but instinctively skeptical that it can wages (e.g., Nicola Persico, Andrew tell us how to do better economics. The tra- Postlewaite, and Dan Silverman 2002) and dition of ignoring psychological regularity in other rewards (e.g., the U.S. Presidency). making assumptions in economic theory is Does the implicit association view imply so deeply ingrained—and has proved rela- that labor-market discrimination is due to a tively successful—that knowing more about taste, a statistical shortcut, or something the brain seems unnecessary. Economic the- else? One piece of evidence suggests the sta- ory will chug along successfully for the next tistical interpretation is on the right track: few years paying no attention at all to neuro- the amygdala that is active when people see science (just as it paid little attention to psy- other-race faces seems to be sensitive to chology until recently). But it is hard to familiarity of faces, not race per se (Dubois believe that some neuroscientific regularities et al. 1999). This is consistent with an inter- will not help explain some extant anomalies, pretation of statistical discrimination in particularly those that have been debated which employers do not fear minority work- for decades. ers, they are simply less sure of their abilities. Indeed, in many areas of economics there But other evidence suggests discrimination are basic constructs or variables at the heart is “something else.” Amygdala activity can be of current debates which can be usefully dampened if subjects are shown pictures of thought of as neural processes, and studied black and white faces and asked to judge using fMRI and other tools. For example, how much the pictured people like vegeta- finance is a field awash in literally millions of bles (Wheeler and Fiske 2005). This suggests observations of daily price movements. that automatic reactions to race can be Despite having widespread access to terrific erased (or substituted for) depending on the data, after decades of careful research there question being asked when the faces are per- is no agreed-upon theory of why stock prices ceived. These reactions respond to variables fluctuate, why people trade, and why there mr05_Article 1 3/28/05 3:25 PM Page 54

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are so many actively managed mutual funds product’s quality or, for “network” or “sta- despite poor fund performance. Perhaps tus” goods, a product’s likely popularity. knowing more about basic neural mecha- Many of these models seem like strained nisms that underlie conformity, attention attempts to explain effects of advertising paid to large price changes, wishful thinking, without incorporating the obvious intuition sense-making of random series, and percep- that advertising taps neural circuitry of tions of expertise can help explain these reward and desire. puzzles (e.g., Lo and Repin 2002). Finally, economic models do not provide a Furthermore, some scholars have argued satisfying theory of how individuals differ. As that large fluctuations in stock prices are laymen, we characterize other people as due to reasonable time-variation of risk pre- impulsive or deliberate, stable or neurotic, mia. But there is no theoretical basis in decisive or indecisive, mature or immature, finance for why attitudes toward risk would foolish or wise, depressed or optimistic, scat- vary over time. Maybe neuroscience can terbrained or compulsively organized. The supply one. consumers who spend countless dollars on In labor markets, a major puzzle is why self-help, “organize your life” manuals, and wages are so downward sticky. Firms say they who sustain the huge, and infinitely varied are afraid to cut wages because they want to psychological counseling industry, are typi- maintain worker morale (e.g., Truman cally unhappy where they stand on some of Bewley 2002); and experiments show that these dimensions and are looking for ways to when worker productivity is valuable, paying change. Comparative economic develop- a high wage induces effort, even when work- ment, entrepreneurial initiative and innova- ers are free to shirk (Fehr and Gachter tion, business cycle sensitivity, and other 2000). Presumably morale is some combina- important macroeconomic behaviors are tion of workers’ emotional feelings toward probably sensitive to the distribution of these their employer and may be very sensitive to and other psychological “assets.” Yet there is recent experience, to what other workers no complete way to discuss them with the think, to whether wage cuts are “procedural- language of beliefs and desires, which is the ly just,” and so forth. There is no reason only language operating in quadrant I. these processes could not be described as 6.1 Can Neuroscience Save Rational neural processes and studied that way. Choice Economics? There are many anomalies in intertemporal choice. In the United States, credit card Many neuroscientists are now using the debt is substantial ($5,000.00 per household) most basic elements of rational choice theo- and a million personal bankruptcies have ry to explain what they see. Ironically, they been declared in each of several years are taking up rational choice theory at the (Laibson, Andrea Repetto, and Jeremy same time as more and more economists are Tobacman 1998). Healthier food is cheaper moving away from rational choice toward a and more widely available than ever before, behavioral view anchored in limits on ration- but spending on dieting and obesity are both ality, willpower, and greed (which we expect on the rise. Surely understanding how brain to be informed by neural detail). For exam- mechanisms process reward, and curb or ple, neuroscientific studies of simple reward produce compulsion, and their evolutionary circuitry in rats and primates vindicate some origins (e.g., Trent Smith 2003) might help of the simplest ideas of economics—namely, explain these facts and shape sensible policy a “common brain currency” which permits and regulation. substitution (Shizgal 1999), existence of neu- Prevailing models of advertising assume rons which encode expected reward (see that ads convey information or signal a Glimcher 2002 and Figure 3), and revealed mr05_Article 1 3/28/05 3:25 PM Page 55

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preference (macaques viewing socially val- Repetto and Tobacman 1998; O’Donoghue ued images, see Deaner, Khera, and Platt and Rabin 1999). Laibson’s (2001) model of 2005). Other groups are using Bayesian homeostatic response to environmental cues models. One study concluded that “the cen- in addiction is an incremental model well tral nervous system therefore employs grounded in recent neuroscience. [Bayesian] probabilistic models during sen- However, we believe that in the long run a sorimotor learning” (Konrad Körding and more “radical” departure from current theo- Daniel Wolpert 2004). ry will become necessary, in the sense that Our view is that establishing a neural basis the basic building blocks will not just consist for some rational choice principles will not of preferences, constrained optimization and necessarily vindicate the approach as widely (market or game-theoretic) equilibrium. applied to humans. The reason is that the After all, the point of constrained optimiza- studies which have most clearly established tion is to model behavior precisely and pre- expected-value and Bayesian encoding use dict how behavior changes in response to simple tasks which monkeys and humans are changes in budget constraints and prices. well-evolved to perform (e.g., reaching to There is no reason other models starting earn a juice reward). It is quite possible that from a very different basis could not be con- simple rational mechanisms are neurally structed, while also predicting behavioral instantiated to do these tasks well. But the responses to constraints and prices, and pre- most important kinds of economic behavior dicting responses to other variables as well. involve manipulating abstract symbols, think- Furthermore, thinking about the brain does ing about groups of people and complex not so much “falsify” rational choice theories institutions, trading off very different types of as suggest entirely new distinctions and rewarding objects across time, and weighing questions. them by probabilities which are not always For example, is learning that a particular learnable by experience. Ironically, rational person cooperated with you in a game choice models might therefore be most use- encoded as a cognitive reputational statistic ful in thinking about the simplest kinds of about that person, like a numerical test score, decisions humans and other species make— or a “warm glow” which produces a surge of involving perceptual tradeoffs, motor move- dopamine when you see the person’s face ments, foraging for food, and so forth—and (Singer et al. 2004; cf. James Rilling et al. prove least useful in thinking about abstract, 2002). Standard game theory has no answer complex, long-term tradeoffs which are the for this question. But the distinction matters. traditional province of economic theory. If reputations are encoded dopaminergically, then they may spill over across groups of 6.2 Incremental Versus Radical people who look the same, for example, or Neuroeconomics who are perceived as being part of a group How should neuroeconomics contribute who behave similarly (Bill McEvily et al. to advances in economic analysis? In the 2003; Paul Healy 2004). Or the mechanism short-run, an “incremental” approach in can work in reverse—since attractive faces which psychological evidence suggests func- are known to produce dopaminergic surges tional forms will help enhance the realism of (Aharon et al. 2001), the cortex may mistake existing models. For example, the two- these positive signals of cooperativeness parameter “ß–δ“ hyperbolic discounting (which also produces pleasurable sensations) approach (where ß expresses preference for and automatically judge attractive faces as immediacy, and is equal to one in the stan- likely to be cooperative. This simple neural dard model) is an example that has proven question about reward spillover might form productive theoretically (e.g., Laibson, the foundation of group affiliation and social mr05_Article 1 3/28/05 3:25 PM Page 56

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capital and have something to do with why trade could also flow in the opposite direc- some countries are rich and others poor. tion. Neuroscience is shot through with Our main theme in this paper is that radi- familiar economic language — delegation, cal models should respect the fact that brain division of labor, constraint, coordination, mechanisms combine controlled and auto- executive function — but these concepts are matic processes, operating using cognition not formalized in neuroscience as they are in and affect. The Platonic metaphor of reason economics. There is no overall theory of how as a charioteer, driving twin horses of passion the brain allocates resources that are essen- and appetite, is on the right track—except tially fixed (e.g., blood flow and attention). reason has its hands full with headstrong An “economic model of the brain” could help passions and appetites.26 Of course, the chal- here. Simple economic concepts, like mech- lenge in radical-style theorizing is to develop anisms for rationing under scarcity, and gen- models of how multiple mechanisms interact eral versus partial equilibrium responses to which are precise. Can this be done? The shocks, could help neuroscientists under- answer is Yes. Bernheim and Rangel (2004), stand how the entire brain interacts. At a Loewenstein and O’Donoghue (2004), and technical level, neuroscientists are using Jess Benhabib and Alberto Bisin (2002) have tools imported from econometrics, such as all proposed recent models with interacting Granger causality (e.g., Wolfram Hesse et al. mechanisms much like those in our Table 1. 2003), to draw better inferences from neural Furthermore, while interactions of multi- time series. Finally, as the center of gravity in ple brain mechanisms might appear to be neuroscience research shifts from elemen- too radical a change from equilibrium with tary cognitive processes to the study of so- utility maximization, we think many familiar called higher functions—reasoning, social tools can be used to do radical neuroeco- inference, and decision making—neurosci- nomics. Interactions of cognition and affect entists will increasingly reference, and draw might resemble systems like supply and inspiration from, the conceptual apparatus of demand, or feedback loops which exhibit economics, a unique distillate of our century- multiple equilibria. The interaction of con- long reflection on individual and strategic trolled and automatic processes might be behavior. like an inventory policy or agency model in REFERENCES which a controller only steps in when an Adolphs, Ralph, Daniel Tranel, Hanna Damasio, and extreme state of the system (or unusual Antonio R. Damasio. 1995. “Fear and the Human event) requires controlled processes to Amygdala.” Journal of Neuroscience, 15(9): 5879–91. override automatic ones. The influence of Aharon, Itzhak, Nancy Etcoff, Dan Ariely, Chris F. Chabris, Ethan O’Connor, and Hans C. Breiter. 2001. affect on choices is a very general type of “Beautiful Faces Have Variable Reward Value: fMRI state-dependence (where the “state” is and Behavioral Evidence.” Neuron, 32(3): 537–51. affective, and is influenced by external cues Allman, John, Atiya Hakeem, and Karli Watson. 2002. “Two Phylogenetic Specializations in the Human and also by internal deliberation and Brain.” Neuroscientist, 8(4): 335–46. restraint). Instead of solving for equilibria in Ameriks, John, Andrew Caplin, and John Leahy. 2003. these interacting-mechanism models, solve “Wealth Accumulation and the Propensity to Plan.” The Quarterly Journal of Economics, 118(3): for steady states or cyclic fluctuations. 1007–47. Instead of summarizing responses to Anderson, Adam K., Kalina Christoff, David Panitz, changes by comparative statics, study Eve De Rosa, and John D. Gabrieli. 2003. “Neural Correlates of the Automatic Processing of Threat impulse-response functions. Facial Signals.” Journal of Neuroscience, 23(13): Although we focused solely on applications 5627–33. of neuroscience to economics, intellectual Ariely, Dan and George Loewenstein. 2003. “The Heat of the Moment: The Effect of Sexual Arousal on Decision Making,” CMU Working Paper. 26 Thanks to Nava Ashraf for clarifying this point. Ariely, Dan, Uri Gneezy, George Loewenstein, and mr05_Article 1 3/28/05 3:25 PM Page 57

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