Tuesday, February 2, 2010


Hayek begins with a question: What is the problem we wish to solve when we try to construct a rational economic order?

Let me counter with a question of my own: What is the problem we wish to solve when we try to construct a work of art?

I am sick and tired of economists pretending that people act in their own rational self interest. We are living in a time when we are beginning to understand what goes on in our brains when we make decisions. Forget about whether or not it's possible, should we even try to design a 'rational' economy?

The brain is often likened to a computer. In this metaphor, visual data is collected by the eyes, then travels through the optic nerve, is processed by the visual cortex, and finally sent on to the frontal cortex, which takes the processed visual information and tells us what to do with it. For example, light bounces off of a baseball and on into the eyes. An image of a baseball is formed on the retina and the information of that image is sent up the optic nerve and into the visual cortex. That information is then processed and sent up to the frontal cortex, which makes a determination that the image has been getting bigger and bigger, it might be a good idea to duck. The frontal cortex then sends the appropriate signals to the different parts of the brain which control movement. The end result is that the person sees the baseball moving toward them, thinks about why that might be a bad thing, and decides to flinch, throw up their hands and duck. Unfortunately this metaphor is almost entirely incorrect.

Anyone who’s ever been scared or startled and flinched or jumped at seeing something has experienced an instance where the brain is operating on autopilot, or below the level of consciousness. Go back to the example of the fast moving baseball. According to Dan Dennett in his book Consciousness Explained, “There is a substantial delay before cerebral activities, initiated by a sensory stimulus, achieve ‘neuronal adequacy’ for eliciting any resulting conscious sensory experience.” In other words the frontal cortex, and by extension our conscious mind, isn’t even aware of the decision to duck until we’ve already started ducking. The visual information about the fast moving baseball is sent by the eyes to the visual cortex where it is processed and distributed to other modules in the brain that ultimately control the reaction. It’s only after the ducking procedure has started that the frontal cortex is notified, and our conscious mind is allowed into the decision making process. If you’ve ever burned your hand on a hot stove, you’ve experienced the fact that your brain is quite capable of getting you to move without asking for ‘your’ permission first.

In many respects the human brain is like an argumentative group of people in a corporate business meeting (or the SWEET Scholars) rather than a computer. The decision making pathways are often ‘loud and messy’ like a group of emotional people with differing opinions rather than linear and calculated like a computer crunching the numbers. Consider the following experiment designed by Brian Knutson and George Loewenstein. The scientists wanted to investigate what happens inside the brain when a person makes typical consumer choices. Think about a situation where you are trying to decide which bottle of jelly or jam to add to your shopping cart. In the experiment people were given a substantial amount of spending money and then offered the chance to buy dozens of different objects. The items up for purchase ranged from the latest Harry Potter book, to gourmet chocolate or even a digital voice recorder.

The experimental subjects brains were being scanned by a functional MRI machine which allowed the scientists to see in real time which parts of the brain were most active. After staring at the object for several seconds, the subject was then shown the cost of the item and then asked to decide if they wished to purchase it. The scientists discovered that when a subject was first shown an object, his nucleus accumbens was turned on. According to Jonah Lehrer, in his book How We Decide, the nucleus accumbens (NAcc) “is a crucial part of the dopamine reward pathway, and the intensity of its activation was a reflection of the desire for the item.” For example, if a person didn’t really like chocolate, then their NAcc didn’t get too excited when they were shown gourmet chocolate candy.

When the subjects were shown the price tag of the item, the researchers determined that the insula and the prefrontal cortex showed a heightened activity. According to Lehrer, “The insula produces aversive feelings and is triggered by things like nicotine withdrawal and pictures of people in pain. In general, we try to avoid anything that makes our insulas excited. This includes spending money.” According to this section of the brain, spending money can be a painful experience. Knutson and his colleagues speculate that these areas of the brain were computing the cost of the item and trying to find out if it was a good deal. The prefrontal cortex became the most stimulated when the cost of the item was significantly lower than normal.

As a result of seeing all of this brain activity in real time, the researchers were able to accurately predict whether or not the subjects would purchase the item. The scientists and researchers knew which products would be purchased before the people making the decisions themselves did. According to this research shopping can be an intensely emotional experience with decisions being made below the conscious level. In situations where the shopper experiences difficulty making decisions, it can be a result of the consciousness, through the frontal cortex trying to impose a top down solution on the rest of the brain’s decision making modules. In another study conducted by Timothy Wilson, at the University of Virginia found that the more people thought about a purchase the less likely they would be satisfied with it in the long run. Wilson also made the determination that when a person was asked to analyze the reasons for their specific shopping preferences they were more likely to purchase something they didn’t like and in one instance over 75% of the subjects regretted their selections.

In situations where we are overwhelmed by an enormity of choice it is possible to be almost paralyzed with indecision. We may feel like choosing one option, but then we try to ‘talk ourselves out of it’ for one reason or another. Recently it has come to light that this is a function of the way our brains process information. Often times different parts of the brain that are responsible for different types of calculations send signals that are usually just below the level of consciousness. This means that we are thinking without being aware of exactly what. Common wisdom would tell us that the key to making a decision that we’ll be happy with in the long run is to gather more information about our choices and spend more time in thought, when in actuality the opposite is true. Would rational, efficient thought work like that?

Hayek wrote his article in what? 1945? We hadn’t even developed the technology to even begin to understand how we behave when we think we are acting rationally. Our problem isn’t lack of information, or improper information collection techniques.

Our problem is that we make our ‘best’ decisions (the ones we regret the least) when our information is limited, or at the very least collected by our subconscious.

And finally, who the hell cares about efficiency anyway. I don’t think I’ve ever been complimented for being an ‘efficient’ lover. I'm inefficient. The begging to actual action ratio is way off!

(Parts of this post came from a paper I wrote last semester... I can't remember if I tried these arguments out on this blog or with the scholars before. Let me know if I get to repeating myself.)


  1. I suppose your comment about efficency being necessary is an interesting one. I guess efficency only matters if you cannot afford the waste associated with being inefficent. For example driving a gas guzzler to work everyday. It is less efficent than a hybrid but you accept that inefficency because you can afford it and perhaps for some irrational sentimental attachments to the car.

  2. I think I remember you mentioning these studies before but I'm still not sure what you're trying to argue. These scans seem to show the process of an individual composing their utility functions in real-time. Deciding what basket of goods they'd like to purchase given an income constraint. Even if this is occurring on a sub-conscious level I don't see how this conflicts with making a rational choice.

    So a consumer might maximize utility by making an impulsive decision rather than a long thought out one. An impulsive decision might be a completely rational one if it makes the decider happy or the decision is made given some time constraint.

    See you Thursday Josh, I've got a book that should be right up your alley.

  3. One example of an irrational economic decision: Trading the governorship for a few nights with an expensive hooker. That doesn't sound like a maximization of utility to me. For other examples of irrational decisions see any newspaper on any given day...