Why Do We Make Bad Decisions? Findings From a New Science
Why Do We Make Bad Decisions? Findings From a New Science
Today's Research on Aging / Population Reference Bureau (US)
We all make bad decisions from time to time, decisions that diminish our well-being either right away or years later. However, some of these bad decisions are more than occasional, rising to the level of chronic patterns in the general population. Many of these recurring behaviors seemingly defy rational explanations.
For example:
Why do emotions dominate deliberative thinking in many people’s working, purchasing, and saving decisions?
Why do many people save less while they are working than they will obviously need after they retire?
Why do people tend to overspend and undersave when using a credit card?
Why do people’s perceptions of fairness sometimes affect their decisions in ways that leave everyone involved worse off?
These quandaries represent apparent anomalies in people’s decisionmaking. They constitute patterns that depart from what people “ought” to be doing to preserve or improve their own well-being or that of those they care about. These incongruities occur with enough frequency and in such varied circumstances that they have attracted the attention of three groups of scientists—economists, psychologists, and
neuroscientists—who study different aspects of the decisionmaking process and its outcomes. The integrated study of decision processes by scientists from these very different disciplines is called neuroeconomics. It is barely two decades old. Its practitioners hope, eventually, to shed light on the aspects of decisionmaking that
lead some people to prepare inadequately for their old age and to make decisions during their retirement years that harm their well-being (Camerer, Loewenstein, and Prelec
2005). Some of the findings so far indicate the kind of progress that can be expected.
Dual Paths Toward a Decision
Traditional economics distinguishes between “rational” behavior that moves people toward maximizing their own well-being and “irrational” behavior that harms their wellbeing. The predictions of traditional economic models depend on most people behaving rationally most of the time. Psychologists, for their part, distinguish between
“cognitive” and “emotional” mental processes. The first type is analytic; the second type is affective, dealing with feelings. Neuroscientists distinguish parts of the brain that
handle deliberative thinking (the neocortex) and other distinct parts that operate automatically and more quickly (the limbic region).
It is becoming clear that the three distinctions above, although called different names in the three different sciences, are in fact the same (Camerer, Loewenstein, and Prelec 2005). How we think when confronting a decision emerges in parallel with how we feel about it, and from two different parts of the brain and at different speeds. Evolutionary psychologists have carried this distinction a step further, arguing that the emotional/
affective/automatic/irrational/fast aspect of our mental processes is very old (McClure et al. 2007). In fact, humans share these aspects of mental processes, along with the corresponding limbic brain region, with many other mammals, suggesting common sources in the evolutionary chain.
However, the cognitive/analytical/deliberative/rational
aspect of our mental processes developed much more recently
in evolutionary history, along with the corresponding
brain region, the neocortex. Beyond elementary levels,
humans possess these mental processes uniquely in the animal
kingdom. Nor is this corresponding part of the brain
well developed in other animals. Evolutionary psychologists
also point out that automatic mental processes may not be
adapted for modern life, deriving as they did from very different
environments tens of thousands of years ago.
In this light, what economists have decried as irrational
appears as a quite normal—and explainable—component of
decisionmaking. This scientific finding has three implications.
First, individuals—you and I—can come to better
understand and control decisionmaking processes and
improve the outcomes. Second, social and psychological scientists
can learn to predict people’s decisions and behaviors
more accurately. Third, those who aim to influence our decisions—
advertisers, employers, and policymakers—can
increasingly base their messages and policies on how people
actually decide to purchase or save, work or retire, and
engage in healthy or unhealthy behaviors.
Recent Research Projects
Four recent research projects illustrate the methods and findings
of this new science. In work supported by the National
Institute on Aging, an interdisciplinary team monitored the
brain activity of healthy younger and older adults while they
anticipated monetary gains and losses (Samanez Larkin et al. 2007). Younger and older adults did not differ in their reaction
while considering potential gains, but younger adults
reacted more strongly than older adults when considering
potential losses. The older participants displayed a considerably
reduced negative reaction toward losses than did their
younger counterparts, whether their reactions were recorded
in brain activity or reported verbally. This asymmetry in the
processing of gains and losses in older adults has implications
for their decisionmaking. It suggests that they may be
less cautious than younger adults in evaluating decision
options unfavorable to their well-being.
All people (as well as other mammals) prefer a desirable
outcome to happen sooner rather than later. Humans can
carry this trade-off into the future, while other mammals do
not distinguish between several minutes from now and any
more distant outcome. An interdisciplinary team supported
by the National Institutes of Health used neuroimaging to
understand how people trade off the desirability of a reward
against the elapsed time before the reward happens
(McClure et al. 2007). They found that the limbic region is
more involved when an immediate reward is part of the
choice, whereas areas of the neocortex are equally involved
whether the choice involves an immediate award or two
delayed awards. Hence, emotional and automatic responses
are more likely to influence a decision between two desirable
outcomes when one of them is available right now and the
other one later. Rational, deliberative thinking is more likely
to hold sway when both objects of choice are in the future.
For example, consider choosing between a pleasurable outing
in the country right now and two pleasurable outings a week
from now. Both limbic and neocortex areas of the brain
would be involved in the process of choosing. But now consider
the same choice moved a week forward: You are choosing
between the same pleasurable outing a week from now
and two pleasurable outings two weeks from now. Limbic
activity would be much reduced in making this latter choice.
Hence, for older adults, as for others, decisionmaking can be
more rational if the choices do not include a desirable outcome
available at the moment
An NIA-supported team of neuroscientists, psychologists,
and economists examined how the brain considers preferences
and price, two influences on purchasing decisions that
are emphasized by economists (Knutson et al. 2007). They
found that two distinct brain circuits anticipate gain (preference
for the object) and loss (excessive product price). The
difference in amount of activity in each of these regions predicted the actual subsequent purchases. Hence, even commonplace
purchasing decisions involve the separate calculation
of gains and losses, which lead to (and predict) people’s
actual decisions. So, people’s brains do rationally balance
some gains and losses in making decisions.
In the Ultimatum Game, a well-known economic experiment,
people often choose no reward over a small reward if
they judge that their opponent in the game is taking unfair
advantage. This behavior appears irrational—even a small
reward would seem better than none. Sanfey and his colleagues
(2003) show that brain activations in the limbic
regions (the more ancient region where fast emotional
responses occur) are weaker when players think that their
opponent is a computer than when they think it is another
person. Even with the computer, though, some subjects
would choose no reward rather than tolerate extreme unfairness.
Players are even less willing to tolerate perceived unfairness,
even though they lose the award, when the opponent is
thought to be human. These results suggest that concern for
fairness is a long-ago evolved trait that today induces decisions
that can, in effect, leave all participants worse off.
According to James Rilling, a faculty member at Emory
University Center for Behavioral Neuroscience, “the tendency
to reject unfair offers likely evolved in a social environment
in which repeated interactions with the same person
were common. Sending a message that one will not tolerate
unfair treatment was likely adaptive. In today’s world characterized
by many single-shot, often anonymous interactions,
rejection of unfair offers may be less adaptive.” Public policy
choices should therefore be designed so that considerations
of fairness will not lead to policies that end up hurting
everyone, including those to whom the fairness consideration
is directed.
What Can Neuroeonomics Contribute?
Working together, economists, psychologists, and neuroscientists
can identify regions of the brain that are involved in
particular decision processes, correlate neural activity in
these regions with how people report that they make decisions,
and predict actual behaviors. In so doing, these scientists
can identify components of decisionmaking that,
although not rational, are natural and expected. Learning to
expect these decisionmaking components to be in play is a
first step for persons to take advantage of them in their own
lives or minimize their influence, for health care and financial
providers to recognize at-risk factors and deal with them, and for policymakers to design program participation factors
that will induce the desired behaviors.
Neuroeconomics also has the potential to increase understanding
of how aging changes the neural basis of decisionmaking
in response to reward and punishment (Marschner
et al. 2005). Beyond the question of whether the young and
old process or react similarly to a specific reward system,
there is the question of how adaptive older persons are to
changing systems of rewards. With global population aging,
better understanding of reward-based decisionmaking in the
aging brain has implications for advertisers and health care
providers, among many other professionals.
At this early stage in the development of neuroeconomics,
funding by NIA has fostered the interdisciplinary collaboration
crucial to research advances. In addition, this funding
spurred a much-needed development of methodology.
Investigators have started by studying choices consistent with
people’s stated preferences. Advances in methodology will
soon enable scientists to examine why people make choices
inconsistent with their preferences.
Neuroeconomics is in its infancy. Whether the hard work
scientists must devote to understanding each other across
disciplinary lines will be worth this effort is yet to be known.
Initial indications are that the total of new knowledge will be
more than the sum of its disciplinary parts.
Today's Research on Aging / Population Reference Bureau (US)
Why Do We Make Bad Decisions? Findings From a New Science
We all make bad decisions from time to time, decisions that diminish our well-being either right away or years later. However, some of these bad decisions are more than occasional, rising to the level of chronic patterns in the general population. Many of these recurring behaviors seemingly defy rational explanations.
For example:
Why do emotions dominate deliberative thinking in many people’s working, purchasing, and saving decisions?
Why do many people save less while they are working than they will obviously need after they retire?
Why do people tend to overspend and undersave when using a credit card?
Why do people’s perceptions of fairness sometimes affect their decisions in ways that leave everyone involved worse off?
These quandaries represent apparent anomalies in people’s decisionmaking. They constitute patterns that depart from what people “ought” to be doing to preserve or improve their own well-being or that of those they care about. These incongruities occur with enough frequency and in such varied circumstances that they have attracted the attention of three groups of scientists—economists, psychologists, and
neuroscientists—who study different aspects of the decisionmaking process and its outcomes. The integrated study of decision processes by scientists from these very different disciplines is called neuroeconomics. It is barely two decades old. Its practitioners hope, eventually, to shed light on the aspects of decisionmaking that
lead some people to prepare inadequately for their old age and to make decisions during their retirement years that harm their well-being (Camerer, Loewenstein, and Prelec
2005). Some of the findings so far indicate the kind of progress that can be expected.
Dual Paths Toward a Decision
Traditional economics distinguishes between “rational” behavior that moves people toward maximizing their own well-being and “irrational” behavior that harms their wellbeing. The predictions of traditional economic models depend on most people behaving rationally most of the time. Psychologists, for their part, distinguish between
“cognitive” and “emotional” mental processes. The first type is analytic; the second type is affective, dealing with feelings. Neuroscientists distinguish parts of the brain that
handle deliberative thinking (the neocortex) and other distinct parts that operate automatically and more quickly (the limbic region).
It is becoming clear that the three distinctions above, although called different names in the three different sciences, are in fact the same (Camerer, Loewenstein, and Prelec 2005). How we think when confronting a decision emerges in parallel with how we feel about it, and from two different parts of the brain and at different speeds. Evolutionary psychologists have carried this distinction a step further, arguing that the emotional/
affective/automatic/irrational/fast aspect of our mental processes is very old (McClure et al. 2007). In fact, humans share these aspects of mental processes, along with the corresponding limbic brain region, with many other mammals, suggesting common sources in the evolutionary chain.
However, the cognitive/analytical/deliberative/rational
aspect of our mental processes developed much more recently
in evolutionary history, along with the corresponding
brain region, the neocortex. Beyond elementary levels,
humans possess these mental processes uniquely in the animal
kingdom. Nor is this corresponding part of the brain
well developed in other animals. Evolutionary psychologists
also point out that automatic mental processes may not be
adapted for modern life, deriving as they did from very different
environments tens of thousands of years ago.
In this light, what economists have decried as irrational
appears as a quite normal—and explainable—component of
decisionmaking. This scientific finding has three implications.
First, individuals—you and I—can come to better
understand and control decisionmaking processes and
improve the outcomes. Second, social and psychological scientists
can learn to predict people’s decisions and behaviors
more accurately. Third, those who aim to influence our decisions—
advertisers, employers, and policymakers—can
increasingly base their messages and policies on how people
actually decide to purchase or save, work or retire, and
engage in healthy or unhealthy behaviors.
Recent Research Projects
Four recent research projects illustrate the methods and findings
of this new science. In work supported by the National
Institute on Aging, an interdisciplinary team monitored the
brain activity of healthy younger and older adults while they
anticipated monetary gains and losses (Samanez Larkin et al. 2007). Younger and older adults did not differ in their reaction
while considering potential gains, but younger adults
reacted more strongly than older adults when considering
potential losses. The older participants displayed a considerably
reduced negative reaction toward losses than did their
younger counterparts, whether their reactions were recorded
in brain activity or reported verbally. This asymmetry in the
processing of gains and losses in older adults has implications
for their decisionmaking. It suggests that they may be
less cautious than younger adults in evaluating decision
options unfavorable to their well-being.
All people (as well as other mammals) prefer a desirable
outcome to happen sooner rather than later. Humans can
carry this trade-off into the future, while other mammals do
not distinguish between several minutes from now and any
more distant outcome. An interdisciplinary team supported
by the National Institutes of Health used neuroimaging to
understand how people trade off the desirability of a reward
against the elapsed time before the reward happens
(McClure et al. 2007). They found that the limbic region is
more involved when an immediate reward is part of the
choice, whereas areas of the neocortex are equally involved
whether the choice involves an immediate award or two
delayed awards. Hence, emotional and automatic responses
are more likely to influence a decision between two desirable
outcomes when one of them is available right now and the
other one later. Rational, deliberative thinking is more likely
to hold sway when both objects of choice are in the future.
For example, consider choosing between a pleasurable outing
in the country right now and two pleasurable outings a week
from now. Both limbic and neocortex areas of the brain
would be involved in the process of choosing. But now consider
the same choice moved a week forward: You are choosing
between the same pleasurable outing a week from now
and two pleasurable outings two weeks from now. Limbic
activity would be much reduced in making this latter choice.
Hence, for older adults, as for others, decisionmaking can be
more rational if the choices do not include a desirable outcome
available at the moment
An NIA-supported team of neuroscientists, psychologists,
and economists examined how the brain considers preferences
and price, two influences on purchasing decisions that
are emphasized by economists (Knutson et al. 2007). They
found that two distinct brain circuits anticipate gain (preference
for the object) and loss (excessive product price). The
difference in amount of activity in each of these regions predicted the actual subsequent purchases. Hence, even commonplace
purchasing decisions involve the separate calculation
of gains and losses, which lead to (and predict) people’s
actual decisions. So, people’s brains do rationally balance
some gains and losses in making decisions.
In the Ultimatum Game, a well-known economic experiment,
people often choose no reward over a small reward if
they judge that their opponent in the game is taking unfair
advantage. This behavior appears irrational—even a small
reward would seem better than none. Sanfey and his colleagues
(2003) show that brain activations in the limbic
regions (the more ancient region where fast emotional
responses occur) are weaker when players think that their
opponent is a computer than when they think it is another
person. Even with the computer, though, some subjects
would choose no reward rather than tolerate extreme unfairness.
Players are even less willing to tolerate perceived unfairness,
even though they lose the award, when the opponent is
thought to be human. These results suggest that concern for
fairness is a long-ago evolved trait that today induces decisions
that can, in effect, leave all participants worse off.
According to James Rilling, a faculty member at Emory
University Center for Behavioral Neuroscience, “the tendency
to reject unfair offers likely evolved in a social environment
in which repeated interactions with the same person
were common. Sending a message that one will not tolerate
unfair treatment was likely adaptive. In today’s world characterized
by many single-shot, often anonymous interactions,
rejection of unfair offers may be less adaptive.” Public policy
choices should therefore be designed so that considerations
of fairness will not lead to policies that end up hurting
everyone, including those to whom the fairness consideration
is directed.
What Can Neuroeonomics Contribute?
Working together, economists, psychologists, and neuroscientists
can identify regions of the brain that are involved in
particular decision processes, correlate neural activity in
these regions with how people report that they make decisions,
and predict actual behaviors. In so doing, these scientists
can identify components of decisionmaking that,
although not rational, are natural and expected. Learning to
expect these decisionmaking components to be in play is a
first step for persons to take advantage of them in their own
lives or minimize their influence, for health care and financial
providers to recognize at-risk factors and deal with them, and for policymakers to design program participation factors
that will induce the desired behaviors.
Neuroeconomics also has the potential to increase understanding
of how aging changes the neural basis of decisionmaking
in response to reward and punishment (Marschner
et al. 2005). Beyond the question of whether the young and
old process or react similarly to a specific reward system,
there is the question of how adaptive older persons are to
changing systems of rewards. With global population aging,
better understanding of reward-based decisionmaking in the
aging brain has implications for advertisers and health care
providers, among many other professionals.
At this early stage in the development of neuroeconomics,
funding by NIA has fostered the interdisciplinary collaboration
crucial to research advances. In addition, this funding
spurred a much-needed development of methodology.
Investigators have started by studying choices consistent with
people’s stated preferences. Advances in methodology will
soon enable scientists to examine why people make choices
inconsistent with their preferences.
Neuroeconomics is in its infancy. Whether the hard work
scientists must devote to understanding each other across
disciplinary lines will be worth this effort is yet to be known.
Initial indications are that the total of new knowledge will be
more than the sum of its disciplinary parts.