The science of spending
Carnegie Mellon professor George Lowenstein probably isn’t an all-knowing enemy, but he can certainly tell what you’re going to do next. He also knows whether people are tightwads or spendthrifts before they even spend a dime.
Lowenstein, the Herbert A. Simon professor of economics and psychology in the Department of Social and Decision Sciences, does more than just call names. He also has the power to anticipate spending choices.
Lowenstein and his team, including postdoctoral candidate Scott Rick and graduate student Cynthia Cryder, recently published two papers — “Tightwards and Spendthrifts” and “Neuroeconomics: How Neuroscience Can Inform Economics“ — about how people make purchasing decisions and what they feel when they make them. The papers were based on brain imaging studies, which indicate that certain areas of the brain, responsible for both pleasure and pain, are active when people decide what they want. By observing the activation of these brain structures, Lowenstein and his colleagues are able to predict what choice people will make before they are even aware of it themselves.
Economists have long maintained that consumers make choices based on preference and price. These decisions are supposed to be rational choices that maximize one’s present and future utility. “Economics assumes that the goal of human behavior is to satisfy one’s preferences,” explained Lowenstein.
More recent research, however, has discovered that parts of the brain associated with experiences of both pleasure and pain play a critical role at the moment a choice is made. Lowenstein and his team hypothesize that rather than weighing the present good versus the future alternative, people instead try to decide between the immediate pleasure of consumption and the immediate pain of paying for it. “People’s preferences change quite dramatically, sometimes moment to moment,” added Lowenstein.
This is an overhaul on the classical economic orthodoxy and may change the way economists view people’s consumption choices. “Our findings challenge the standard consequentialist perspective of economics.... We find that pleasure and pain experienced at the moment of choice influence purchasing decisions,” stated Rick in an e-mail.
Shedding light on the complicated interplay between emotion and reason in the decision making process has spawned two new fields of study, both of which have advanced rapidly in the past six years. Affective psychology, the study of the integration of emotional and cognitive processes, evaluates processes underlying emotions and cognition. The other, neuroeconomics, explores how we make choices, investigating what occurs in the brain when we evaluate decisions. According to Rick, Carnegie Mellon hosted the first conference on neuroeconomics in May 1997.
Both of these fields are associated with decision sciences, an interdisciplinary field including economics, history, philosophy, political science, and psychology that studies how people make decisions, taking into account both neural and social aspects of decision making. Traditional fieldwork was done through observations and surveys, but advances in medical imaging are opening up a new area of exploration.
The use of functional magnetic resonance imaging (fMRI) techniques has enabled scientists to look into what exactly happens in the brain when a person chooses whether to buy the chocolate bar or the healthier sour apple, for example. “With neuroimaging technology, we no longer have to infer preferences from decisions. We can examine the formation of preferences in the brain,” explained Rick. “Neuroimaging allowed us to examine whether activation in brain regions previously associated with the experience of pain deterred actual spending decisions.”
Lowenstein, along with Brian Knutson, assistant professor of psychology & neuroscience at Stanford University and MIT Sloan professor Drazen Prelec, published “Neural Predictors of Purchases” in the January issue of Neuron. The report details their findings of brain activity when people are asked to make spending decisions. Scientists are able to look directly into people’s brains to see real-time brain activity using fMRI machines which measure blood flow to particular regions of the brain. This is then represented graphically, using colors to indicate levels of activity, for interpretation and analysis.
Using fMRI techniques, the researchers showed that the insular complex (insula) and nucleus accumbens are activated when people make purchasing decisions. Previous research has shown that the insula is activated when one experiences pain. It is also associated with basic emotions such as anger, fear, disgust, happiness, and sadness. In the research, when people were shown the prices of goods that they could buy, this area of the brain became activated. It was especially active for people who were classified as tightwads. “We found that spending money is painful,” Knutson said.
The nucleus accumbens has a role in processing many rewards: sex, food (drugs), and rock and roll — it has been found to be involved in the regulation of emotions when people hear music. The accumbens was an indicator of preference; whether or not the person actually wanted to buy the product they were shown. If a slice of Union Grill’s Death by Chocolate looked irresistable, Lowenstein would certainly know.
Based on the MRI study, Lowenstein and his team have been able to create a tightwad-spendthrift scale, which can classify people based on their propensity to make certain spending decisions. As part of its research, the team offered a survey to the Carnegie Mellon community.
Tightwads, in the anticipation of pain that will follow, tend to spend less than they would like. They experience an immediate pain of paying as they try to decide whether or not to get another round of beer, for example. Tightwads may go home sober more often than not, while spendthrifts would live it up. Being frugal, however, is not the same as being a tightwad. Frugal people actual get pleasure from saving money. On the flip side, spendthrifts overspend because they feel too little pain when making the decision.
Ever feel like your own spending is checked by the fact that your money comes from home? That is actually not so. “The source of money often influences how it is spent. People are looser with ‘house money’ than they are with what they perceive as their own money,” explained Rick.
But does being a spendthrift or tightwad have any effect on happiness? On an individual level, both tightwads and spendthrifts are reportedly less happy than people who are not conflicted about buying something new or not being able to buy it.
Both the insula and the nucleus accumbens are located in an area of the brain that evolved very early and is found in many other species. “It’s highly probable that these brain areas were used for survival: Should I go into that hole or not; should I drink from that pond; should I chase that animal,” Knutson said.
Studying areas of the ancient brain, neuroeconomics is highly tied into evolutionary psychology as the neural interconnections and brain structures developed over the course of human existence. The evolution of these sections of the brain was not to make spending decisions, but rather to weigh choices about food, mating, and avoiding risks. Knutson said, “Conflicts between reason and passion often lead us to behave differently than we would ideally like to behave.”
According to Knutson, neuroeconomics will continue to evolve rapidly. “Using brain imaging to predict things is the next big step,” he said. “I think this field will continue getting more interdisciplinary, involving economics, decision science, psychology, and psychiatry.”
Knutson continued, “I see this as having two implications: First, nobody really knows how emotions are implemented in decision making.” Further research in these areas will shed light on how reason and emotion interact on a neurological level. “Second,” he said, “individuals can use this [information] to make better decisions.”
Credit cards may actually affect how people spend their money by mitigating the immediate pain of payment. Tightwads may relent and get the backrub from the blonde Swedish masseuse, while spendthrifts may opt for the entire spa package. If spendthrifts want to control their spending, Knutson recommends that they not use credit cards. “Credit cards lessen the immediate pain of paying,” he said. More research may show that credit cards are another product that shortchanges our brain circuitry into making decisions our rational selves may not like. Credit cards may soon be rubbing elbows with sugary foods, cigarettes, drugs, and alcohol in the world of vices.
Does this research actually indicate that tightwads are averse to spending any money? “George [Lowenstein] puts it like this: The decision is about the present good versus the future good.... What we are looking at is a subjective reaction,” Knutson explained. “It’s not the product, but how much we like it. It’s not the price but the ridiculousness of it.” This means that most tightwads do not agonize about their spending but feel a level of increasing discomfort if they judge the price to be too great.
Fortunately, Knutson does not see an Orwellian future for shoppers, where marketers and retailers take advantage of advances made in neuroeconomics and figure out how to get you to part with your money. “This is more of a proof of concept,” he said. And his work still has a long way to go. The fMRI experiments performed are very sensitive to movement. If a person were to turn his or her head, the entire session would have to be restarted.
Drug companies may eventually be able to make a pill for chronic overspenders. Whether that day is coming soon or not, the nature of economics and decision science is changing. Tightwads and spendthrifts alike have one thing in common; both of their spending habits are wrapped up in the brain.