Have you ever wondered how it is that we can simultaneously see a dinner purchased at Wendy's (which might cost us $20 per person) as relatively cheap, and yet simultaneously see spending $20 per person on ingredients for a dinner we cooked for ourselves at home as lavishly expensive. Ok, maybe you haven't experienced that particular conundrum, but certainly there are some things that are cheap in dollar terms that you view as relatively expensive, while simultaneously seeing some things that are expensive in dollar terms that you view as a bargain.
The answer lies in the complex workings on the human brain. Understanding our decision-making on a very fundamental level is the role of the exciting emerging field of neuroeconomics. Neuroeconomics is blurring the boundaries between economics, psychology and economics and offering new insights into how we make decisions.
So, on that note, I found this news release from Washington University School of Medicine from last November interesting:
Researchers at Washington University School of Medicine in St. Louis have found that when monkeys are faced with a choice between two options, the firing of neurons activated in the brain adjusts to reflect the enormity of the decision. Such an approach would explain why the same person can see 20 cents as a lot one moment and $5,000 as a little the next, the researchers said.
“Everybody recognizes this behavior, because everybody does it,” said senior author Camillo Padoa-Schioppa, PhD, an associate professor of neuroscience, of economics and of biomedical engineering. “This paper explains where those judgments originate. The same neural circuit underlies decisions that range from a few dollars to hundreds of thousands of dollars. We found that a system that adapts to the range of values ensures maximal payoff.”...
While you are contemplating whether to order a scoop of vanilla or strawberry ice cream, a part of your brain just above the eyes is very busy. Brain scans have shown that blood flow to a brain area known as the orbitofrontal cortex increases as people weigh their options.
Neurons in this part of the brain also become active when a monkey is faced with a choice. As the animal tries to decide between a sip of, say, apple juice or grape juice, two sets of neurons in its orbitofrontal cortex fire off electrical pulses. One set reflects how much the monkey wants apple juice; the other set corresponds to the animal’s interest in grape juice. The faster the neurons fire, the more highly the monkey values that option.
A similar process likely occurs as people make decisions, the researchers said. But what happens to firing rates when a person stops thinking about ice cream and starts thinking about houses? A house might be hundreds of thousands of times more valuable than a cup of ice cream, but neurons cannot fire pulses 100,000 times faster. The speed at which they can fire maxes out at about 500 spikes per second.
How does this explain the example I started this blog post with? It appears (to me, at least), that this research (which you can read here, but beware - it's very technical) is showing that there are biological underpinnings for why relative comparisons matter, more than absolute comparisons. The research was on rhesus monkeys rather than humans, but human brain functioning probably works in very similar ways. The firing of neurons associated with different options depends on what the other options are and their relative value to us, rather than their absolute value in terms of the overall universe of things that we could receive. In other words, our preferences adjust to the scale of values in the choices we are making:
The researchers concluded that making a choice between two juices is not a simple matter of comparing the firing rates of the apple-juice neurons to the firing rates of the grape-juice neurons. Instead, neurons pegged to each option feed into a neural circuit that processes the data and corrects for differences in scale.
It’s a system optimized for making the best possible choice – the one that reflects true preferences over a vast range of values, even though some detail gets lost at the higher end.
“It was a puzzle: How does the brain handle this enormous variability?” said Padoa-Schioppa. “We showed that a circuit that has adaptation and corrects for it ensures maximal payoff. And these findings have implications for understanding why people make the choices they do. There’s a good neurological reason for behavior that might seem illogical.”
Neuroeconomics is pretty cool. Expect to see a lot more of this type of research in the future, especially combined with machine learning to deal with the complexity of brain scan data.
[HT: Marginal Revolution]
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