March 28, 2009— -- A brain-scanning study of people making financial choices suggests that when given expert advice, the decision-making parts of our brains often shut down.
The problem with this, of course, is that the advice may not be good.
"When the expert's advice made the least sense, that's where we could see the behavioral effect," said study co-author Greg Berns, an Emory University neuroscientist. "It's as if people weren't using their own internal value mechanisms."
Berns' specialty is neuroeconomics, a once-obscure field of research that's received heightened attention since the global economic slowdown left people at a loss to explain how the market's invisible hand picked their pockets.
Of course, describing a few behavioral tendencies is no substitute for a detailed analysis of market deregulation, poorly conceived derivative contracts and all the other factors that fueled the slowdown. But studies like Berns', published Tuesday in Public Library of Science ONE, and another on hormones and day trading (testosterone is good for individual traders, but possibly bad for everyone else), have cast scientific doubt on a central tenet of free-market fundamentalism.
Contrary to neoliberal economic theory, markets are not always driven by individuals acting rationally in their own best interests.
"Many economists live in a peculiar world inhabited by other economists. It's called the world of rational decisionmaking," said Berns. "In this world, you take advice, integrate it with your own information, and come to a decision. If that were true, we'd have seen activity in regions that track decisions. But what we found is that when someone receives advice, those relationships went away."
In the study, Berns' team hooked 24 college students to brain scanners as they contemplated swapping a guaranteed payment for a chance at a higher lottery payout. Sometimes the students made the decision on their own. At other times they received written advice from Charles Noussair, an Emory University economist who advises the U.S. Federal Reserve.
Though the recommendations were delivered under his imprimatur, Noussair himself wouldn't necessarily follow it. The advice was extremely conservative, often urging students to accept tiny guaranteed payouts rather than playing a lottery with great odds and a high payout. But students tended to follow his advice regardless of the situation, especially when it was bad.
When thinking for themselves, students showed activity in their anterior cingulate cortex and dorsolateral prefrontal cortex — brain regions associated with making decisions and calculating probabilities. When given advice from Noussair, activity in those regions flat lined.
The findings, based on a small number of college students in a controlled setting, are necessarily preliminary, but their implications are common-sense. Berns recommended that investors do their own research, be careful, and remember that fancy credentials and financial pedigrees are no guarantee of economic wisdom.
In the future, however, Berns said it might be possible to construct a brain-scanning device that lets people know when their decision-making faculties go to sleep.
The question then, he said, is whether people would still make sensible decisions.
"That's a great study," said Berns. "Maybe I'll apply for some stimulus money to do it."