Marines Defiling Dead Taliban – Might Recent Neuroscience Shed Light?

From The Daily Princetonian:

Failure in the part of the brain that controls social functions could explain why regular people might commit acts of ruthless violence, according to new study by a University research team.

A particular network in the brain is normally activated when we meet someone, empathize with him and think about his experiences.

However, MRI technology showed that when a person encounters someone he deems a drug addict, homeless person or anyone he finds repulsive, parts of this network may fail to activate, creating a pathway to “dehumanized perception” — a failure to acknowledge others’ thoughts and experiences.

According to the study, this process of dehumanizing victims could explain how propoganda portraying Jews as vermin in Nazi Germany and Tutsis of Rwanda as cockroaches led to genocide.

“We all dehumanize other people to some extent,” psychology professor [and Situationist Contributor] Susan Fiske said in an email, noting that it is impossible to delve into the mind of every person we pass.

“That being said, we have shown that people can rehumanize a group they might normally ignore, just by thinking about their preferences, as when a soup kitchen worker thinks about a homeless person’s food preferences.”

Earlier work from the team dealt with social cognition or how individuals perceive the thoughts of others with a study that had individuals think about a day in the life of another person.

The new research attempted to build upon this idea further to include the network in the brain charged with disgust, attention and cognitive control.

To collect their data, the scientists had 119 undergraduates at the University complete judgment and decision-making surveys as they looked at images of individuals such as a firefighter, female college student, elderly man, disabled woman, homeless woman and male drug addict.

This exercise sought to study how the network in the brain involved in social cognition reacted to common emotions shared by participants about the people in the images.

The researchers found that parts of the network in the brain did not activate when participants viewed the images of drug addicts, homeless people and immigrants.

“We all have the capacity to engage in dehumanized perception; it’s not just reserved for serial killers,” Harris said in an email. “There are many routes to dehumanization, and different people may use different routes.”

One such route, according to Harris, may be to avoid thinking about the suffering of others — people who dehumanize homeless people may do this.

Another route could be to view someone as a means to an end. Sports fans may engage in this when they think about trading a favorite player to another team.

Fiske and Harris plan to replicate the study on imprisoned psychopaths, and are continuing to explore the different routes to dehumanized perception.

For a collection of related Situationist posts, see The Interior Situation of Atrocities.

The Dehumanized Situation of Atrocities

From Duke Today, a story about recent research by Situationist Contributor Susan Fiske:

A father in Louisiana bludgeoned and beheaded his disabled 7-year-old son last August because he no longer wanted to care for the boy.

For most people, such a heinous act is unconscionable.

But it may be that a person can become callous enough to commit human atrocities because of a failure in the part of the brain that’s critical for social interaction. A new study by researchers at Duke University and Princeton University suggests this function may disengage when people encounter others they consider disgusting, thus “dehumanizing” their victims by failing to acknowledge they have thoughts and feelings.

This shortcoming also may help explain how propaganda depicting Tutsi in Rwanda as cockroaches and Hitler’s classification of Jews in Nazi Germany as vermin contributed to torture and genocide, the study said.

“When we encounter a person, we usually infer something about their minds. Sometimes, we fail to do this, opening up the possibility that we do not perceive the person as fully human,” said lead author Lasana Harris, an assistant professor in Duke University’s Department of Psychology & Neuroscience and Center for Cognitive Neuroscience. Harris co-authored the study with Susan Fiske, a professor of psychology at Princeton University.

Social neuroscience has shown through MRI studies that people normally activate a network in the brain related to social cognition — thoughts, feelings, empathy, for example — when viewing pictures of others or thinking about their thoughts.  But when participants in this study were asked to consider images of people they considered drug addicts, homeless people, and others they deemed low on the social ladder, parts of this network failed to engage.

What’s especially striking, the researchers said, is that people will easily ascribe social cognition — a belief in an internal life such as emotions — to animals and cars, but will avoid making eye contact with the homeless panhandler in the subway.

“We need to think about other people’s experience,” Fiske said. “It’s what makes them fully human to us.”

The duo’s previous research suggested that a lack of social cognition can be linked to not acknowledging the mind of other people when imagining a day in their life, and rating them differently on traits that we think differentiate humans from everything else.

This latest study expands on that earlier work to show that these traits correlate with activation in brain regions beyond the social cognition network. These areas include those brain areas involved in disgust, attention and cognitive control.

The result is what the researchers call “dehumanized perception,” or failing to consider someone else’s mind. Such a lack of empathy toward others can also help explain why some members of society are sometimes dehumanized, they said.

For this latest study, 119 undergraduates from Princeton completed judgment and decision-making surveys as they viewed images of people. The researchers sought to examine the students’ responses to common emotions triggered by images such as:

— a female college student and male American firefighter (pride);
— a business woman and rich man (envy);
— an elderly man and disabled woman (pity);
— a female homeless person and male drug addict (disgust).

After imagining a day in the life of the people in the images, participants next rated the same person on various dimensions. They rated characteristics including the warmth, competence, similarity, familiarity, responsibility of the person for his/her situation, control of the person over their situation, intelligence, complex emotionality, self-awareness, ups-and-downs in life, and typical humanity.

Participants then went into the MRI scanner and simply looked at pictures of people.

The study found that the neural network involved in social interaction failed to respond to images of drug addicts, the homeless, immigrants and poor people, replicating earlier results.

“These results suggest multiple roots to dehumanization,” Harris said. “This suggests that dehumanization is a complex phenomenon, and future research is necessary to more accurately specify this complexity.”

The sample’s mean age was 20, with 62 female participants. The ethnic composition of the Princeton students who participated in the study was 68 white, 19 Asian, 12 of mixed descent, and 6 black, with the remainder not reporting.

The study, “Dehumanized Perception: A Psychological Means to Facilitate Atrocities, Torture, and Genocide?” appears in a recent issue of the Journal of Psychology.

Image from Flickr.

Related Situationist posts:

Susan Fiske’s New Book

• Susan Fiske Discusses her Work on Different Types of Prejudices
• The Situation of Objectification,
• Do Doctors Lack Empathy?
• Racial bias clouds ability to feel others’ pain,
• Students’ Situations Leave Them Less Empathetic (Situationist)
• The Interior Situation of Complex Human Feelings,
• The Neuro-Situation of Violence and Empathy,
• It’s Hard to Step into Someone Else’s Shoes,
• The Power of Suggestion,
• The Situation of Objectification,
• The Situation of Psychopaths
• The Situation of Morality and Empathy,
• The Situation of Caring,
• New Study Looks at the Roots of Empathy,
• Jennifer Eberhardt’s “Policing Racial Bias” – Video, and
• Hoyas, Hos, & Gangstas.

Shocking for Money

From Science News:

When faced with a thorny moral dilemma, what people say they would do and what people actually do are two very different things, a new study finds. In a hypothetical scenario, most people said they would never subject another person to a painful electric shock, just to make a little bit of money. But for people given a real-world choice, the sparks flew.

The results . . . serve as a reminder that hypothetical scenarios don’t capture the complexities of real decisions.

Morality studies in the lab almost always rely on asking participants to imagine how they’d behave in a certain situation, study coauthor Oriel FeldmanHall of Cambridge University said in her presentation. But these imagined situations are missing teeth: “Whatever you choose, it’s not going to happen,” she said.

But in FeldmanHall’s study, things actually happened. “There are real shocks and real money on the table,” she said. Subjects lying in an MRI scanner were given a choice: Either administer a painful electric shock to a person in another room and make one British pound (a little over a dollar and a half), or spare the other person the shock and forgo the money. Shocks were priced in a graded manner, so that the subject would earn less money for a light shock, and earn the whole pound for a severe shock. This same choice was given 20 times, and the person in the brain scanner could see a video of either the shockee’s hand jerk or both the hand jerk and the face grimace. (Although these shocks were real, they were pre-recorded.)

When researchers gave a separate group of people a purely hypothetical choice, about 64 percent said they wouldn’t ever deliver a shock — even a mild one  — for money. Overall, people hypothetically judging what their actions would be netted only about four pounds on average.

But when there was cold, hard money involved, the data changed. A lot. A whopping 96 percent of people in the scanner chose to administer shocks for cash. “Three times as much money was kept in the real task,” FeldmanHall said. When participants saw only the hand of the person jerk as it got shocked, they chose to walk away with an “astonishing” 15.77 pounds on average out of a possible 20-pound windfall. The number dipped when participants saw both the hand and the face of the person receiving the shock: in these cases, people made off with an average of 11.55 pounds.

People grappling with the real moral dilemma — as opposed to people who had to choose in a  hypothetical situation — had heightened activity in parts of the insula, a brain center thought to be involved in emotion, the study shows. FeldmanHall said that insula activity might represent a sort of visceral tension that’s going on in the body as a person pits the desire for money against the desire to not hurt someone. These visceral conflicts within a person seem to be missing in experiments with no real stakes, she said.

More.

Related Situationist posts:

• The Power of the Situation
• “Video on the Original Milgram Experiment,”
• <Milgram-Inspired Movie
• “The Situation of Stanley Milgram’s Obedience Experiments,”
• “Milgram Replicated on French TV – ‘The Game of Death’,”
• “A Shocking Situation,”
• “Zimbardo on Milgram and Obedience – Part I,”
• “The Case for Obedience,”
• “Replicating Milgram’s Obedience Experiment – Yet Again,”
• “Jonestown (The Situation of Evil) Revisited,”
• “Milgram Remake,” and
• “The Milgram Experiment Today?.”

Drazen Prelect at Harvard Law

On Tuesday, October 12th, the HLS Student Association for Law and Mind Sciences (SALMS) is hosting a talk by MIT professor Drazen Prelec entitled Neuroeconomics.

Professor Prelec works in the departments of Economics and Brain and Cognitive Sciences at MIT.  His research and publications have explored the insights that cognitive science can offer into the ways that the human mind makes economic decisions.  His influential work has helped to found the nascent field of neuroeconomics.

Professor Drelec will be speaking in Pound 107. Free snacks will be provided!

For more information, e-mail salms@law.harvard.edu.

The Situation of Financial Markets

Below the jump you can watch an outstanding and fascinating  video episode, “Mind over Money,” by PBS’s NOVA, that asks the question “Can markets be rational when humans aren’t?” and that includes significant segments describing some of the work by Situationist friend Jennifer Lerner.

(We’ve placed the (52 minute) video after the jump because it plays automatically.)

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The Neuro-Situation of Moral and Economic Decisions

From ThirteenWNET:

To Steven Quartz & Colin Camerer the brain is a huge number-cruncher, assigning a numeric value to everything from a loaf of bread to our most deeply held moral “values.” In that sense, moral decisions are also economic ones. Using a brain scanner (fMRI), they want to catch the brain in the act—to see what it’s doing at exactly the moment a tough moral decision gets made. Their research is pioneering a new branch of neuroscience — neuroeconomics.

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To review a sample of related Situationist posts, see “The Legal Brain,” “Read My Brain – From Science Friday,” “The Situation of Neuroeconomics and Situationist Economics,” and “The Interior Situational Reaction to Inequality.”

The Interior Situational Reaction to Inequality

From EurekAlert:

The human brain is a big believer in equality—and a team of scientists from the California Institute of Technology (Caltech) and Trinity College in Dublin, Ireland, has become the first to gather the images to prove it.

Specifically, the team found that the reward centers in the human brain respond more strongly when a poor person receives a financial reward than when a rich person does. The surprising thing? This activity pattern holds true even if the brain being looked at is in the rich person’s head, rather than the poor person’s.

These conclusions, and the functional magnetic resonance imaging (fMRI) studies that led to them, are described in the February 25 issue of the journal Nature.

“This is the latest picture in our gallery of human nature,” says Colin Camerer, the Robert Kirby Professor of Behavioral Economics at Caltech and one of the paper’s coauthors. “It’s an exciting area of research; we now have so many tools with which to study how the brain is reacting.”

It’s long been known that we humans don’t like inequality, especially when it comes to money. Tell two people working the same job that their salaries are different, and there’s going to be trouble, notes John O’Doherty, professor of psychology at Caltech, Thomas N. Mitchell Professor of Cognitive Neuroscience at the Trinity College Institute of Neuroscience, and the principal investigator on the Nature paper.

But what was unknown was just how hardwired that dislike really is. “In this study, we’re starting to get an idea of where this inequality aversion comes from,” he says. “It’s not just the application of a social rule or convention; there’s really something about the basic processing of rewards in the brain that reflects these considerations.”

The brain processes “rewards”—things like food, money, and even pleasant music, which create positive responses in the body—in areas such as the ventromedial prefrontal cortex (VMPFC) and ventral striatum.

In a series of experiments, former Caltech postdoctoral scholar Elizabeth Tricomi (now an assistant professor of psychology at Rutgers University)—along with O’Doherty, Camerer, and Antonio Rangel, associate professor of economics at Caltech—watched how the VMPFC and ventral striatum reacted in 40 volunteers who were presented with a series of potential money-transfer scenarios while lying in an fMRI machine.

For instance, a participant might be told that he could be given $50 while another person could be given $20; in a second scenario, the student might have a potential gain of only $5 and the other person, $50. The fMRI images allowed the researchers to see how each volunteer’s brain responded to each proposed money allocation.

But there was a twist. Before the imaging began, each participant in a pair was randomly assigned to one of two conditions: One participant was given what the researchers called “a large monetary endowment” ($50) at the beginning of the experiment; the other participant started from scratch, with no money in his or her pocket.

As it turned out, the way the volunteers—or, to be more precise, the reward centers in the volunteers’ brains—reacted to the various scenarios depended strongly upon whether they started the experiment with a financial advantage over their peers.

“People who started out poor had a stronger brain reaction to things that gave them money, and essentially no reaction to money going to another person,” Camerer says. “By itself, that wasn’t too surprising.”

What was surprising was the other side of the coin. “In the experiment, people who started out rich had a stronger reaction to other people getting money than to themselves getting money,” Camerer explains. “In other words, their brains liked it when others got money more than they liked it when they themselves got money.”

“We now know that these areas are not just self-interested,” adds O’Doherty. “They don’t exclusively respond to the rewards that one gets as an individual, but also respond to the prospect of other individuals obtaining a reward.”

What was especially interesting about the finding, he says, is that the brain responds “very differently to rewards obtained by others under conditions of disadvantageous inequality versus advantageous inequality. It shows that the basic reward structures in the human brain are sensitive to even subtle differences in social context.”

This, O’Doherty notes, is somewhat contrary to the prevailing views about human nature. “As a psychologist and cognitive neuroscientist who works on reward and motivation, I very much view the brain as a device designed to maximize one’s own self interest,” says O’Doherty. “The fact that these basic brain structures appear to be so readily modulated in response to rewards obtained by others highlights the idea that even the basic reward structures in the human brain are not purely self-oriented.”

Camerer, too, found the results thought provoking. “We economists have a widespread view that most people are basically self-interested, and won’t try to help other people,” he says. “But if that were true, you wouldn’t see these sort of reactions to other people getting money.”

Still, he says, it’s likely that the reactions of the “rich” participants were at least partly motivated by self-interest—or a reduction of their own discomfort. “We think that, for the people who start out rich, seeing another person get money reduces their guilt over having more than the others.”

Having watched the brain react to inequality, O’Doherty says, the next step is to “try to understand how these changes in valuation actually translate into changes in behavior. For example, the person who finds out they’re being paid less than someone else for doing the same job might end up working less hard and being less motivated as a consequence. It will be interesting to try to understand the brain mechanisms that underlie such changes.”

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For a sample of related Situationist posts, see “Robin Hood Motives,” “Martha Fineman on the Situation of Gender and Equality,” “The Blame Frame – Abstract,” “The Motivated Situation of Inequality and Discrimination,” and “The Situation of Inequality – Guns, Germs, and Steel.”

The Situation of Financial Risk-Taking

[This post was first published in February of 2008.]

In 1986, Salomon Brothers, an investment bank, was known as “the King of Wall Street.” The Salomon atmosphere has since been hilariously depicted in Michael Lewis‘s now-classic Liar’s Poker, in which he recounts his experiences at the firm. He opens the book with the following anecdote.

It was sometime early in 1986, the first year of the decline of my firm, Salomon Brothers. Our chairman, John Gutfreund, left his desk at the head of the trading floor and went for a walk. At any given moment on the trading floor billions of dollars were being risked by bond traders. Gutfreund took the pulse of the place by simply wandering around it and asking questions of the traders. An eerie sixth sense guided him to wherever a crisis was unfolding. Gutfreund seemed able to smell money being lost.

He was the last person a nerve-racked trader wanted to see. Gutfreund (pronounced Good friend) liked to sneak up from behind and surprise you. This was fun for him but not for you. . . . You felt a chill in your bones that I imagine belongs to the same class of intelligence as the nervous twitch of a small furry animal at the silent approach of a grizzly bear. An alarm shrieked in your head: Gutfreund! Gutfreund! Gutfreund!

Often as not, our chairman just hovered quietly for a bit, then left. You might never have seen him. The only trace I found of him on two of these occasions was a turd-like ash on the floor beside my chair, left, I suppose, as a calling card. Gutfreund’s cigar droppings were longer and better formed than those of the average Salomon boss. I always assumed that he smoked a more expensive blend than the rest, purchased with a few of the $40 million he had cleared on the sale of SalomonBrothers in 1981 (or a few of the $3. 1 million he paid himself in 1986,more than any other Wall Street CEO).

This day in 1986, however, Gutfreund did something strange. Instead of terrifying us all, he walked a straight line to the trading desk of John Meriwether, a member of the board of Salomon Inc. and also one of Salomon’s finest bond traders. He whispered a few words. The traders in the vicinity eavesdropped. What Gutfreund said has become a legend at Salomon Brothers and a visceral part of its corporate identity. He said: “One hand, one million dollars, no tears. ”

One hand, one million dollars, no tears. Meriwether grabbed the meaning instantly. The King of Wall Street, as Business Week had dubbed Gutfreund, wanted to play a single hand of a game called Liar’s Poker for a million dollars. He played the game most afternoons with Meriwether and the six young bond arbitrage traders who worked for Meriwether and was usually skinned alive. Some traders said Gutfreund was heavily outmatched. Others who couldn’t imagine John Gutfreund as anything but omnipotent-and there were many said that losing suited his purpose, though exactly what that might be was a mystery.

The peculiar feature of Gutfreund’s challenge this time was the size of the stake. Normally his bets didn’t exceed a few hundred dollars. A million was unheard of. The final two words of his challenge, “no tears, ” meant that the loser was expected to suffer a great deal of pain but wasn’t entitled to whine, bitch, or moan about it. He’d just have to hunker down and keep his poverty to himself. But why? You might ask if you were anyone other than the King of Wall Street. Why do it in the first place? Why, in particular, challenge Meriwether instead of some lesser managing director? It seemed an act of sheer lunacy. Meriwether was the King of the Game, the Liar’s Poker champion of the Salomon Brothers trading floor.

On the other hand, one thing you learn on a trading floor is that winners like Gutfreund always have some reason for what they do; it might not be the best of reasons, but at least they have a concept in mind. I was not privy to Gutfreund’s innermost thoughts, but I do know that all the boys on the trading floor gambled and that he wanted badly to be one of the boys. What I think Gutfreund had in mind in this instance was a desire to show his courage, like the boy who leaps from the high dive. Who better than Meriwether for the purpose? Besides, Meriwether was probably the only trader with both the cash and the nerve to play.

The whole absurd situation needs putting into context. John Meriwether had, in the course of his career, made hundreds of millions of dollars for Salomon Brothers. He had an ability, rare among people and treasured by traders, to hide his state of mind. Most traders divulge whether they are making or losing money by the way they speak or move. They are either overly easy or overly tense. With Meriwether you could never, ever tell. He wore the same blank half-tense expression when he won as he did when he lost. He had, I think, a profound ability to control the two emotions that commonly destroy traders fear and greed and it made him as noble as a man who pursues his self-interest so fiercely can be. He was thought by many within Salomon to be the best bond trader on Wall Street. Around Salomon no tone but awe was used when he was discussed. People would say, “He’s the best businessman in the place,” or “the best risk taker I have ever seen,” or “a very dangerous Liar’s Poker player.”

Meriwether cast a spell over the young traders who worked for him. His boys ranged in age from twenty-five to thirty-two (he was about forty). Most of them had Ph.D.’s in math, economics, and/or physics. Once they got onto Meriwether’s trading desk, however, they forgot they were supposed to be detached intellectuals. They became disciples. They became obsessed by the game of Liar’s Poker. They regarded it as their game. And they took it to a new level of seriousness.

John Gutfreund was always the outsider in their game. That Business Week put his picture on the cover and called him the King of Wall Street held little significance for them. I mean, that was, in a way, the whole point. Gutfreund was the King of Wall Street, but Meriwether was King of the Game. When Gutfreund had been crowned by the gentlemen of the press, you could almost hear traders thinking: Foolish names and foolish faces often appear in public places. . . .

At times Gutfreund himself seemed to agree. He loved to trade. Compared with managing, trading was admirably direct. You made your bets and either you won or you lost. When you won, people will the way up to the top of the firm admired you, envied you, and feared you, and with reason: You controlled the loot. When you managed a firm, well, sure you received your quota of envy, fear, and admiration. But for all the wrong reasons, you did not make the money for Salomon. You did not take risk. You were hostage to your producers. They took risk. They proved their superiority every day by handling risk better than the rest of the risk-taking world. The money came from risk takers such as Meriwether, and whether it came or not was really beyond Gutfreund’s control. That’s why many people thought that the single rash act of challenging the arbitrage boss to one hand for a million dollars was Gutfreund’s way of showing he was a player, too. And if you wanted to show off, Liar’s Poker was the only way to go. The game had a powerful meaning for traders. People like John Meriwether believed that Liar’s Poker had a lot in common with bond trading. It tested a trader’s character. It honed a trader’s instincts. A good player made a good trader, and vice versa. We all understood it.

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The game has some of the feel of trading, just as jousting has some of the feel of war. The questions a Liar’s Poker player asks himself are, up to a point, the same questions a bond trader asks himself. Is this a smart risk? Do I feel lucky? How cunning is my opponent? Does he have any idea what he’s doing, and if not, how do I exploit his ignorance? . . . .

The code of the Liar’s Poker player was something like the code of the gunslinger. It required a trader to accept all challenges.

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You can can read the end of the anecdote here. Our point is to illustrate just how significant the craving for financial risk-taking often is, particularly among those who spend a great deal of time taking such risks. Fascinating recent research by neuroeconomists is teaching us more about the nature and extent of that urge. In yesterday’s New York Times, Jenny Anderson has an article, titled “Craving the High That Risky Trading Can Bring,” summarizing some of those findings. To provide a sense of her article, which is worth the read, we’ve included a few tidbits below.

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A small group of scientists, including some psychologists, say they are starting to discover what many Wall Street professionals have long suspected — that people are hard-wired for money. The human brain, these researchers say, responds to high-stakes trading just as it does to the lure of sex. And the riskier the trades get, the more the brain craves them.

. . . . That is no surprise to Brian Knutson, a professor of psychology and neuroscience at Stanford University and a pioneer in neurofinance, an emerging field that combines psychology, neuroscience and economics, to examine how the brain makes decisions.

Mr. Knutson has sent volunteers through high-power imaging machines to map their brains as they trade. He concludes that sometimes, people get high on making money.

“The more you think you can gain from the risk, the more you take the risk and the more activation in the circuitry,” Mr. Knutson said.

* * * Daniel Kahneman, a Nobel Prize-winning psychologist, showed that individuals do not always act rationally when faced with uncertainty in decision making. When faced with losses, individuals may seek to take more risk rather than less, contrary to what traditional economic thought might suggest.

“When you are threatened with extinction, you act like nothing matters,” said Andrew Lo, a professor at M.I.T. who has studied the role of emotions in trading. . . .

Mr. Lo and Dmitry V. Repin of Boston University have studied traders to determine how stress and emotions affect investment returns. They monitored traders’ vital signs like heart rate, body temperature and respiration as their subjects darted in and out of trades.

The findings, while preliminary, suggest — perhaps unsurprisingly — that traders who let their emotions get the best of them tend to fare poorly in the markets. But traders who rely on logic alone don’t do that well either. The most successful ones use their emotions to their advantage without letting the feelings overwhelm them.

“The best traders are the ones who have controlled emotional responses,” Mr. Lo said. “Professional athletes have the same reaction — they use emotion to psych them up, but they don’t let those emotions take them over.”

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For related Situationist posts, check out “The Situational Rewards of Wages” and “The Situational Character Goes to the Mall.”

The Situation of Neuroeconomics and Situationist Economics

In July, The Economist had a nice article on the burgeoning field of neuroeconomics, titled “Do Economists Need Brains.” We’ve excerpted a few chunks from that article below.

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In the late 1990s a generation of academic economists had their eyes opened by Mr LeDoux’s and other accounts of how studies of the brain using recently developed techniques such as magnetic resonance imaging (MRI) showed that different bits of the old grey matter are associated with different sorts of emotional and decision-making activity. The amygdalas are an example. Neuroscientists have shown that these almond-shaped clusters of neurons deep inside the medial temporal lobes play a key role in the formation of emotional responses such as fear.

These new neuroeconomists saw that it might be possible to move economics away from its simplified model of rational, self-interested, utility-maximising decision-making. Instead of hypothesising about Homo economicus, they could base their research on what actually goes on inside the head of Homo sapiens.

The dismal science had already been edging in that direction thanks to behavioural economics. Since the 1980s researchers in this branch of the discipline had used insights from psychology to develop more “realistic” models of individual decision-making, in which people often did things that were not in their best interests. But neuroeconomics had the potential, some believed, to go further and to embed economics in the chemical processes taking place in the brain.

Early successes for neuroeconomists came from using neuroscience to shed light on some of the apparent flaws in H. economicus noted by the behaviouralists. One much-cited example is the “ultimatum game”, in which one player proposes a division of a sum of money between himself and a second player. The other player must either accept or reject the offer. If he rejects it, neither gets a penny.

According to standard economic theory, as long as the first player offers the second any money at all, his proposal will be accepted, because the second player prefers something to nothing. In experiments, however, behavioural economists found that the second player often turned down low offers—perhaps, they suggested, to punish the first player for proposing an unfair split.

Neuroeconomists have tried to explain this seemingly irrational behaviour by using an “active MRI”. In MRIs used in medicine the patient simply lies still during the procedure; in active MRIs, participants are expected to answer economic questions while blood flows in the brain are scrutinised to see where activity is going on while decisions are made. They found that rejecting a low offer in the ultimatum game tended to be associated with high levels of activity in the dorsal stratium, a part of the brain that neuroscience suggests is involved in reward and punishment decisions, providing some support to the behavioural theories.

As well as the ultimatum game, neuroeconomists have focused on such issues as people’s reasons for trusting one another, apparently irrational risk-taking, the relative valuation of short- and long-term costs and benefits, altruistic or charitable behaviour, and addiction. Releases of dopamine, the brain’s pleasure chemical, may indicate economic utility or value, they say. There is also growing interest in new evidence from neuroscience that tentatively suggests that two conditions of the brain compete in decision-making: a cold, objective state and a hot, emotional state in which the ability to make sensible trade-offs disappears. The potential interactions between these two brain states are ideal subjects for economic modelling.

Already, neuroeconomics is giving many economists a dopamine rush. For example, Colin Camerer of the California Institute of Technology, a leading centre of research in neuroeconomics, believes that incorporating insights from neuroscience could transform economics, by providing a much better understanding of everything from people’s reactions to advertising to decisions to go on strike.

At the same time, Mr Camerer thinks economics has the potential to improve neuroscience, for instance by introducing neuroscientists to sophisticated game theory. “The neuroscientist’s idea of a game is rock, paper, scissors, which is zero-sum, whereas economists have focused on strategic games that produce gains through collaboration.” Herbert Gintis of the Sante Fe Institute has even higher hopes that breakthroughs in neuroscience will help bring about the integration of all the behavioural sciences—economics, psychology, anthropology, sociology, political science and biology relating to human and animal behaviour—around a common, brain-based model of how people take decisions

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However, not everyone is convinced. The fiercest attack on neuroeconomics, and indeed behavioural economics, has come from two economists at Princeton University, Faruk Gul and Wolfgang Pesendorfer. In an article in 2005, “The Case for Mindless Economics”, they argued that neuroscience could not transform economics because what goes on inside the brain is irrelevant to the discipline. What matters are the decisions people take—in the jargon, their “revealed preferences”—not the process by which they reach them. For the purposes of understanding how society copes with the consequences of those decisions, the assumption of rational utility-maximisation works just fine.

* * *

The big question now is whether the tools of neuroscience will allow economics to fulfill Edgeworth’s vision—or, if that is too much to ask, at least to be grounded in the physical reality of the brain. Studies in the first decade of neuroeconomics relied heavily on active MRI scans. Economists’ initial excitement at being able to enliven their seminars with pictures of parts of the brain lighting up in response to different experiments (so much more interesting than the usual equations) has led to a recognition of the limits of MRIs. “Curiosity about neuroscience among economists has outstripped what we have to say, for now,” admits Mr Camerer.

* * *

Still, Mr Camerer is confident that neuroeconomics will deliver its first big breakthroughs within five years. Likewise, Mr McCabe sees growing sophistication in neuroeconomic research. For the past four years, a group of leading neuroeconomists and neuroscientists has met to refine questions about the brain and economic behaviour. Researchers trained in both neuroscience and economics are entering the field. They are asking more sophisticated questions than the first generation “spots on brains” experiments, says Mr McCabe, such as “how these spots would change with different economic variables.” He expects that within a few years neuroeconomics will have uncovered enough about the interactions between what goes on in people’s brains and the outside world to start to shape the public-policy agenda—though it is too early to say how.

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To access the whole article, click here. For a collection of related Situationist posts click here and here.

Emotional Reactions to Law & Economics – Abstract

Peter Huang posted his latest manuscript, titled “Emotional Reactions to Law & Economics, Market Metaphors, & Rationality Rhetoric” (forthcoming in Theoretical Foundations of Law and Economics) on SSRN. Here’s the abstract.

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This chapter makes three fundamental points about law and economics. First, although some people feel strong, negative emotional reactions to utilizing microeconomics to analyze non-business areas of law, others feel no such emotional reactions. This chapter advances the hypothesis that people who do not view the world exclusively through an economics lens are likely to experience negative feelings toward applying microeconomics to non-business law areas, while people who view the world primarily through an economics lens are unlikely to experience such emotional reactions. Second, although law and economics remains an uncontroversial subfield of applied microeconomics; it has become a dominant, yet still controversial field of scholarship in legal academia. This chapter proposes that differences in how most academic and professional economists perceive law and economics versus how most academic and professional lawyers perceive law and economics are due primarily to differences in how familiar they are with microeconomics presented in a mathematically rigorous fashion. Third, much research considerably and significantly qualifies many well-known and often quoted alleged benefits of competitive markets and unbounded rationality. People who are familiar with this research appreciate that the extent to which markets and rationality are socially desirable is more complicated than people do not understand this research suggest. This research involves not only traditional microeconomics, but also behavioral economics, cognitive psychology, social psychology, and neuroeconomics.

The Situation of Perceptions – Addendum

We just discovered an interesting blog post discussing Antonio Rangel‘s wine-tasting study described in the previous “The Situation of Perceptions” post. It’s by HealthDay reporter, Steven Reinberg, for NEWS2U Health & Wellness, and it includes some reactions to the experiment from others, including Susan Linn, whose work we’ve described before, and Situationist contributor Jon Hanson. Here is the relevant portion of Reinberg’s piece.

* * *

There has been a belief that the pleasantness associated with a product depends solely on the product, Rangel said. “This suggests that this is not the case. The beliefs about what you are experiencing also affect how pleasant that experience is,” he said.

Rangel thinks that incorporating factors other than the product itself into the experience of that product is part of human nature. “It is something that can be exploited by marketing but has not been created by marketing,” he said.

For Rangel, neuromarketing is a scientific — not a commercial — pursuit. “We want to understand how environmental variables such as pricing affect the computations that the brain makes to make decisions,” he said.

Jon Hanson, a professor of law at Harvard Law School, said the new study spotlights the way marketing can manipulate feelings about a product to influence buying choices, “which we tend to defend as rational and reasoned.”

“This new study seems to shed some valuable light on some of the neural mechanisms behind what makes something seem attractive, flavorful, or pleasant, and may be important in providing additional evidence of just how the Herculean investments in marketing pay off by operating beneath the radar of the more conscious, reasoning components of our minds,” Hanson said.

“In addition, it may suggest one of the ways in which consumers deal with the cognitive dissonance of paying a steep price for something — ‘We enjoy our purchase, more precisely, because we paid more,’ ” he said.

Another expert sees neuromarketing as a way to understand how people think and to make marketing more efficient.

“The use of neuroscientific methods and paradigms to help answer questions of marketing theory has the potential to revolutionize our understanding of the relationship between organizations and consumers,” said Nick Lee, a senior lecturer in the marketing group at the Aston Business School in Birmingham, England.

“This revolution is not necessarily about helping firms to sell more products or control the mind of the consumer but to help scholars understand how marketing works,” Lee added. “Of course, it will also enable firms to market more efficiently, hopefully reducing wasted revenues and further benefiting economic performance.”

But another expert doesn’t see neuromarketing as a benign science.

“Marketing can trump our senses,” said Susan Linn, an instructor in psychiatry at Harvard Medical School and associate director of the Media Center of Judge Baker Children’s Center. “Using medical equipment and medical technology to help marketers do their job better is very troubling.”

Linn thinks the study findings could help marketers find new ways to manipulate consumers by pinpointing their marketing more accurately. “This is particularly troubling with children,” she said.

“The marketing industry has done a good job convincing people about their free will and that they are making logical, well-thought-out decisions about the things that they buy,” Linn said. “Studies like this suggest that, in fact, there are lots of things that influence our responses to marketing and our choices of products that are completely irrational that we might not be aware of.”

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To read the entire article, click here. To read previous posts quoting Susan Linn, see “Hey Dove! Talk to YOUR parent!,” and “McDonalds tastes better than McDonalds, if it’s packaged right.”

The Situation of Perceptions

In the most recent Sunday Boston Globe (Ideas section), Jonah Lehrer wrote a nice article — “Grape expectations: What wine can tell us about the nature of reality” — summarizing recent cognitive neuroscience research illustrating the power of expectations in shaping perceptions and experiences.

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Scientists at CalTech and Stanford recently published the results of a peculiar wine tasting. They provided people with cabernet sauvignons at various price points, with bottles ranging from $5 to $90. Although the tasters were told that all the wines were different, the scientists were in fact presenting the same wines at different prices.The subjects consistently reported that the more expensive wines tasted better, even when they were actually identical to cheaper wines.

The experiment was even more unusual because it was conducted inside a scanner–the drinks were sipped via a network of plastic tubes–that allowed the scientists to see how the subjects’ brains responded to each wine. When subjects were told they were getting a more expensive wine, they observed more activity in a part of the brain known to be involved in our experience of pleasure.

What they saw was the power of expectations. People expect expensive wines to taste better, and then their brains literally make it so. Wine lovers shouldn’t feel singled out: Antonio Rangel, the Caltech neuroeconomist who led the study, insists that he could have used a variety of items to get similar results, from bottled water to modern art.

Expectations have long been a topic of psychological research, and it’s well known that they affect how we react to events, or how we respond to medication. But in recent years, scientists have been intensively studying how expectations shape our direct experience of the world, what we taste, feel, and hear. The findings have been surprising– did you know that generic drugs can be less effective merely because they cost less?–and it’s now becoming clear just how pervasive the effects of expectation are.

The human brain, research suggests, isn’t built for objectivity. The brain doesn’t passively take in perceptions. Rather, brain regions involved in developing expectations can systematically alter the activity of areas involved in sensation. The cortex is “cooking the books,” adjusting its own inputs depending on what it expects.

Although much of this research has been done by scientists interested in marketing and consumer decisions, the work has broad implications. People assume that they perceive reality as it is, that our senses accurately record the outside world. Yet the science suggests that, in important ways, people experience reality not as it is, but as they expect it to be.

* * *
Even our most primal bodily sensations, like pain, are vulnerable to the influence of expectation. Tor Wager, a neuroscientist at Columbia University, gave college students electrical shocks while they were stuck in a brain-scanning machine. Half of the people were then supplied with a placebo, . . . [and they] said the shocks were significantly less painful.

Wager then imaged the specific parts of the brain that controlled this psychological process. When people were told that they’d just received a pain-relieving cream, their prefrontal cortex, a brain area normally associated with rational thought, responded by inhibiting the activity of brain areas (like the insula) that normally respond to pain. However, when the same people were informed that the cream was “ineffective,” their prefrontal cortex went silent. Because people expected to experience less pain, they ended up experiencing less pain. Their predictions became self-fulfilling prophecies.

A similar mental process helps explain a wide variety of seemingly bizarre consumer behaviors.

* * *

[The article then describes experiments by Baba Shiv, a neuroeconomist at Stanford, involving differently priced “energy” drinks.] [T]he people who paid discounted prices consistently solved fewer puzzles than the people who paid full price for the drinks, even though the drinks were identical.

* * *

Why did the cheaper energy drink prove less effective? According to Shiv, a kind of placebo effect is at work. Since we expect cheaper goods to be less effective, they generally are less effective, even if they are identical to more expensive products. This is why brand-name aspirin works better than generic aspirin and why Coke tastes better than cheaper colas, even if most consumers can’t tell the difference in blind taste tests.

* * *

One of the implications of Shiv’s experiment is that it’s possible to make a product more “effective” by increasing its price. A good marketing campaign can have a similar effect, as it instills consumers with lofty expectations about the quality of the product. . . .

* * *According to [Frederic] Brochet, [a cognitive psychologist at the University of Bordeaux,] the lesson . . . is that our experience is the end result of an elaborate interpretive process, in which the brain parses our sensations based upon our expectations. If we think a wine is red, or that a certain brand is better, then we will interpret our senses to preserve that belief. Such distortions are a fundamental feature of the brain.

Nevertheless, scientists insist that consumers can take steps to protect themselves from their expectations. . . .

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To read how, read the rest of Lehrer’s article here. Lehrer has a gem of a blog over at Frontal Cortex, which we’ve just added to our blogroll.

The Situation of Financial Risk-Taking

In 1986, Salomon Brothers, an investment bank, was known as “the King of Wall Street.” The Salomon atmosphere has since been hilariously depicted in Michael Lewis‘s now-classic Liar’s Poker, in which he recounts his experiences at the firm. He opens the book with the following anecdote.

It was sometime early in 1986, the first year of the decline of my firm, Salomon Brothers. Our chairman, John Gutfreund, left his desk at the head of the trading floor and went for a walk. At any given moment on the trading floor billions of dollars were being risked by bond traders. Gutfreund took the pulse of the place by simply wandering around it and asking questions of the traders. An eerie sixth sense guided him to wherever a crisis was unfolding. Gutfreund seemed able to smell money being lost.

He was the last person a nerve-racked trader wanted to see. Gutfreund (pronounced Good friend) liked to sneak up from behind and surprise you. This was fun for him but not for you. . . . You felt a chill in your bones that I imagine belongs to the same class of intelligence as the nervous twitch of a small furry animal at the silent approach of a grizzly bear. An alarm shrieked in your head: Gutfreund! Gutfreund! Gutfreund!

Often as not, our chairman just hovered quietly for a bit, then left. You might never have seen him. The only trace I found of him on two of these occasions was a turd-like ash on the floor beside my chair, left, I suppose, as a calling card. Gutfreund’s cigar droppings were longer and better formed than those of the average Salomon boss. I always assumed that he smoked a more expensive blend than the rest, purchased with a few of the $40 million he had cleared on the sale of SalomonBrothers in 1981 (or a few of the $3. 1 million he paid himself in 1986,more than any other Wall Street CEO).

This day in 1986, however, Gutfreund did something strange. Instead of terrifying us all, he walked a straight line to the trading desk of John Meriwether, a member of the board of Salomon Inc. and also one of Salomon’s finest bond traders. He whispered a few words. The traders in the vicinity eavesdropped. What Gutfreund said has become a legend at Salomon Brothers and a visceral part of its corporate identity. He said: “One hand, one million dollars, no tears. ”

One hand, one million dollars, no tears. Meriwether grabbed the meaning instantly. The King of Wall Street, as Business Week had dubbed Gutfreund, wanted to play a single hand of a game called Liar’s Poker for a million dollars. He played the game most afternoons with Meriwether and the six young bond arbitrage traders who worked for Meriwether and was usually skinned alive. Some traders said Gutfreund was heavily outmatched. Others who couldn’t imagine John Gutfreund as anything but omnipotent-and there were many said that losing suited his purpose, though exactly what that might be was a mystery.

The peculiar feature of Gutfreund’s challenge this time was the size of the stake. Normally his bets didn’t exceed a few hundred dollars. A million was unheard of. The final two words of his challenge, “no tears, ” meant that the loser was expected to suffer a great deal of pain but wasn’t entitled to whine, bitch, or moan about it. He’d just have to hunker down and keep his poverty to himself. But why? You might ask if you were anyone other than the King of Wall Street. Why do it in the first place? Why, in particular, challenge Meriwether instead of some lesser managing director? It seemed an act of sheer lunacy. Meriwether was the King of the Game, the Liar’s Poker champion of the Salomon Brothers trading floor.

On the other hand, one thing you learn on a trading floor is that winners like Gutfreund always have some reason for what they do; it might not be the best of reasons, but at least they have a concept in mind. I was not privy to Gutfreund’s innermost thoughts, but I do know that all the boys on the trading floor gambled and that he wanted badly to be one of the boys. What I think Gutfreund had in mind in this instance was a desire to show his courage, like the boy who leaps from the high dive. Who better than Meriwether for the purpose? Besides, Meriwether was probably the only trader with both the cash and the nerve to play.

The whole absurd situation needs putting into context. John Meriwether had, in the course of his career, made hundreds of millions of dollars for Salomon Brothers. He had an ability, rare among people and treasured by traders, to hide his state of mind. Most traders divulge whether they are making or losing money by the way they speak or move. They are either overly easy or overly tense. With Meriwether you could never, ever tell. He wore the same blank half-tense expression when he won as he did when he lost. He had, I think, a profound ability to control the two emotions that commonly destroy traders fear and greed and it made him as noble as a man who pursues his self-interest so fiercely can be. He was thought by many within Salomon to be the best bond trader on Wall Street. Around Salomon no tone but awe was used when he was discussed. People would say, “He’s the best businessman in the place,” or “the best risk taker I have ever seen,” or “a very dangerous Liar’s Poker player.”

Meriwether cast a spell over the young traders who worked for him. His boys ranged in age from twenty-five to thirty-two (he was about forty). Most of them had Ph.D.’s in math, economics, and/or physics. Once they got onto Meriwether’s trading desk, however, they forgot they were supposed to be detached intellectuals. They became disciples. They became obsessed by the game of Liar’s Poker. They regarded it as their game. And they took it to a new level of seriousness.

John Gutfreund was always the outsider in their game. That Business Week put his picture on the cover and called him the King of Wall Street held little significance for them. I mean, that was, in a way, the whole point. Gutfreund was the King of Wall Street, but Meriwether was King of the Game. When Gutfreund had been crowned by the gentlemen of the press, you could almost hear traders thinking: Foolish names and foolish faces often appear in public places. . . .

At times Gutfreund himself seemed to agree. He loved to trade. Compared with managing, trading was admirably direct. You made your bets and either you won or you lost. When you won, people will the way up to the top of the firm admired you, envied you, and feared you, and with reason: You controlled the loot. When you managed a firm, well, sure you received your quota of envy, fear, and admiration. But for all the wrong reasons, you did not make the money for Salomon. You did not take risk. You were hostage to your producers. They took risk. They proved their superiority every day by handling risk better than the rest of the risk-taking world. The money came from risk takers such as Meriwether, and whether it came or not was really beyond Gutfreund’s control. That’s why many people thought that the single rash act of challenging the arbitrage boss to one hand for a million dollars was Gutfreund’s way of showing he was a player, too. And if you wanted to show off, Liar’s Poker was the only way to go. The game had a powerful meaning for traders. People like John Meriwether believed that Liar’s Poker had a lot in common with bond trading. It tested a trader’s character. It honed a trader’s instincts. A good player made a good trader, and vice versa. We all understood it.

* * *
The game has some of the feel of trading, just as jousting has some of the feel of war. The questions a Liar’s Poker player asks himself are, up to a point, the same questions a bond trader asks himself. Is this a smart risk? Do I feel lucky? How cunning is my opponent? Does he have any idea what he’s doing, and if not, how do I exploit his ignorance? . . . .

The code of the Liar’s Poker player was something like the code of the gunslinger. It required a trader to accept all challenges.

* * *

You can can read the end of the anecdote here. Our point is to illustrate just how significant the craving for financial risk-taking often is, particularly among those who spend a great deal of time taking such risks. Fascinating recent research by neuroeconomists is teaching us more about the nature and extent of that urge. In yesterday’s New York Times, JennyAnderson has an article, titled “Craving the High That Risky Trading Can Bring,” summarizing some of those findings. To provide a sense of her article, which is worth the read, we’ve included a few tidbits below.

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A small group of scientists, including some psychologists, say they are starting to discover what many Wall Street professionals have long suspected — that people are hard-wired for money. The human brain, these researchers say, responds to high-stakes trading just as it does to the lure of sex. And the riskier the trades get, the more the brain craves them.

. . . . That is no surprise to Brian Knutson, a professor of psychology and neuroscience at Stanford University and a pioneer in neurofinance, an emerging field that combines psychology, neuroscience and economics, to examine how the brain makes decisions.

Mr. Knutson has sent volunteers through high-power imaging machines to map their brains as they trade. He concludes that sometimes, people get high on making money.

“The more you think you can gain from the risk, the more you take the risk and the more activation in the circuitry,” Mr. Knutson said.

* * *Daniel Kahneman, a Nobel Prize-winning psychologist, showed that individuals do not always act rationally when faced with uncertainty in decision making. When faced with losses, individuals may seek to take more risk rather than less, contrary to what traditional economic thought might suggest.

“When you are threatened with extinction, you act like nothing matters,” said Andrew Lo, a professor at M.I.T. who has studied the role of emotions in trading. . . .

Mr. Lo and Dmitry V. Repin of Boston University have studied traders to determine how stress and emotions affect investment returns. They monitored traders’ vital signs like heart rate, body temperature and respiration as their subjects darted in and out of trades.

The findings, while preliminary, suggest — perhaps unsurprisingly — that traders who let their emotions get the best of them tend to fare poorly in the markets. But traders who rely on logic alone don’t do that well either. The most successful ones use their emotions to their advantage without letting the feelings overwhelm them.

“The best traders are the ones who have controlled emotional responses,” Mr. Lo said. “Professional athletes have the same reaction — they use emotion to psych them up, but they don’t let those emotions take them over.”

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For related Situationist posts, check out “The Situational Rewards of Wages” and “The Situational Character Goes to the Mall.”