07/07/2010

The Brain and Choice

Mind Your Business - 14 May 2007 The Brain and Choice

You go to a shop to buy a bottle of drink. You are faced w ith an array of different products aligned in the shop cooler. You scan the shelves taking in the different products on offer and also taking note of the prices. A bottle of coke is 65p, Sprite, 69p, Pepsi 60p, 7-Up, 64p and Lucozade Isotonic 75p. Which do you choose?

Lots of choices, lots of prices, - which do you choose and what role does the brain play in making that choice? Copyright: Robert Aichinger, from stock.xchng.

Any student w ith know ledge of business or economics w ould be able to tell quite a story about this seemingly simple activity. To the student of economics, the issues w ould centre on scarcity, choice, opportunity cost and value. The scarcity element defines the limited incomes that w e possess in relation to our w ants and needs; the choice relates to how w e allocate that scarce resource (defined as income in this case); the opportunity cost is w hat w e are sacrificing in making that choice and finally, the value is related to a w hole host of quite complex things associated w ith our personal perceptions, w hich might include taste, the image we w ant to project about ourselves, how w e view shapes, packages, perceive messages and logos and so on. The business student might be interested in any or all of the follow ing: The process by w hich each firm that produces the drinks are attempting to persuade us to buy their product rather than any of the others The prices that have been set by the retailer Where they are positioned in the store The w ay they are packaged and promoted The costs of producing the items and how they w ere produced The added value offered by each drink Ultimately, how ever, you make a choice and buy the Lucozade Isotonic. In some respects the choice might seem strange - the drink w ill do its job of satisfying thirst but so w ould all of the others. The fact that it is priced higher than the rest might lead us to asking questions about

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07/07/2010 The Brain and Choice w hy you made that choice rather than going for the cheapest drink on the shelf. There must have been other reasons and factors that w ent into the making of that particular choice.
In economics and business studies, the reasons for decision making are the subject of much interest. Do w e make decisions based on rational behaviour - seeking to maximise utility (satisfaction) given the constraint of limited incomes? Or do w e make decisions on the basis of risk - are w e risk-averse or risk-seeking?

How we view risk is an important part of decision-making - something that has been given greater prominence in economics in recent years. How far we understand the role that risk plays in decisionmaking is still to be determined. Copyright: Charles Thompson, from stock.xchng.

Businesses w ill be interested in w hy people make decisions on purchases because it gives them more information on w hich to base their marketing and pricing decisions. For businesses, understanding the decision-making process might be an important part of the design and execution of advertising. Does advertising actually w ork? If so, how does it w ork? Is the effect of an advert immediate or longer term? How do humans react to the constant reminder about products that w e experience everyday? How can a business make itself and its message and identity stand out from the mass of information that w e are bombarded w ith every day? Making decisions on purchases, how and w hy w e choose to buy the things w e buy, might be far more complex than w e imagined. The w orld of neuroscience is starting to offer up more insight into the decision-making process. Over the last ten years, our know ledge and understanding of how the brain w orks has grow n massively. You may have been exposed to the periphery of this new research in schools and colleges w here 'brain-based learning' has become quite fashionable.
Making decisions is an everyday part of life - in many cases we make these decisions subconsciously, but the complexity of the thought process and brain activity associated with it might be something we are not aware of. If we knew more about the role of the brain in decision-making then we might be in a position to influence purchasing decisions. Copyright: Steve Woods, from stock.xchng.

Sadly, much of the w ork that has permeated into education represents a simplified and often mechanistic view of the human brain. The 'left brain - right brain' notion provides some insight into different functions of the brain but is a far too simple representation of how the brain w orks. The brain has around one hundred billion cells (neurons). Brain cells make links that form neural pathw ays and it is these links that help us to learn. It is estimated that there might be bized.co.uk/current/mind//140507.htm

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07/07/2010 The Brain and Choice as many as one hundred trillion such neural links although others have put the figure much higher - 1 w ith millions of zeros after it. The number of neural links has been likened to trying to imagine all the trees in the Amazon rainforest as the number of neurons and the number of leaves on every tree in the rainforest as the number of neural connections. When w e are dealing w ith these sorts of numbers, the simplification of the brain's functioning is put into some sort of context!

MRI scanning has improved our ability to understand how the brain works. We have learnt more in the last ten years than in the previous 100! Copyright: Max Brown, from stock.xchng.

Much of the new research into how the brain w orks has been boosted by the development of magnetic resonance imaging (MRI) technology. This technology allow s us to be able to gain a greater understanding of the complex processes that are involved in normal human activity. Different parts of the brain can be show n to be more active in certain types of human physical and mental activity than others and w hilst w e still have much to learn about the brain, the leap in our understanding has not only helped the medical profession but also business and economics. There is now a grow ing branch of both subjects that uses the research into the brain to help build understanding of how w e behave. This branch is referred to variously as neuromarketing or neuroeconomics. This MYB w ill look in a bit more detail at some research into how w e make purchasing decisions and how this research might be used in business and economics.

Theory
Everything w e do as human beings has something to do w ith the brain. The most involuntary reflex through to the carefully calculated decision is all channelled through our brains. Its pow er and capacity puts the most sophisticated computers to shame. Whilst our understanding of the brain has risen exponentially, w e still only understand a fraction about how it w orks. The complex chemical and electrical processes that go into any action are at a very early stage in our understanding. What w e do know is that a better understanding of the brain could help us understand so much more about economics and business.

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The Brain and Choice

A greater understanding of the brain is helping us understand how we make purchasing decisions. Copyright: Rodrigo Galindo, from stock.xchng.

Part of the w ay this might w ork is through building models that help to give us some understanding of the role of the brain in things like decision-making. Models are useful in that they might provide a means to understand a process and in so doing allow us to be able to offer some predictions about how humans might behave in certain situations and in particular circumstances and contexts. The pow er of these models to predict behaviour accurately and consistently relies on the quality of the information that w e are able to input into the model. This is w here magnetic resonance imaging might help to provide some of the answ ers. Tw o pieces of research that w e w ill be referring to focus on w ork by psychologists and neuroscientists in the United States. In one piece of research, the investigators looked at the role played by different areas of the brain in making decisions about investing in financial assets. In the other, the researchers looked at the role of the brain in making purchasing decisions related to preference and price. The latter research focused on the choice of consumers in purchasing chocolate. In both cases, the research w as investigating how we balance out our anticipation of the gains and losses that w e might get from purchases and w hether there w as any part of the brain that w as associated w ith being stimulated w hen faced w ith the likely gains and losses of a prospective purchase. The principle behind this investigation w as based on the anticipatory effects that w e get w hen faced w ith a purchasing decision. It is not difficult to conceptualise on a personal level. Think about a time w hen you go into a shop or a store and see something you really like. It might be an expensive purchase and you might know that you should not really be thinking of buying it but the item has really caught your attention and you are debating w hether to buy it or not. On the one hand, you know that the price that is being asked represents a loss - the money you w ill have to give up is an opportunity cost and means you w ill have to sacrifice other things that it could also buy you. Equally, you also know that ow ning this item w ill provide you w ith some form of gain - satisfaction. When making the purchasing decision, therefore, you are balancing out these competing forces. The brain plays a role in this (obviously) but exactly w hich part of the brain is involved and w hether it can help us predict behaviour is another matter. There seems to be tw o main parts of the brain that are involved in such decisions - the nucleus accumbens and the anterior insular. The nucleus accumbens emits tw o neuro transmitters dopamine and serotonin. The former is associated w ith desire and the latter w ith inhibition.

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The Brain and Choice

Image taken from The Brain from Top to Bottom under copyleft.

The anterior insula is a part of the brain that has some association w ith emotional experience and conscious feelings. This w ill include feelings of pain, anger, happiness, disgust, fear and anger.

Image from Wikimedia Commons.

The researchers w ere trying to find out w hat role these tw o parts of the brain play in decision making. The research w as relatively complex but the main results from their investigations are given below . When making decisions on financial instruments, investors tend not to act rationally. These can be called 'risk seeking mistakes' and 'risk aversion mistakes'. Activity in the nucleus accumbens has an association w ith risk seeking mistakes and risky choices

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07/07/2010 The Brain and Choice Activity in the anterior insula is associated w ith risk-aversion mistakes and riskless choices
Distinct neural circuits associated w ith anticipatory affect lead to different types of choices Nucleus accumbens activation represents gain prediction Anterior insula activation represents loss prediction Activation of these brain regions can predict decisions to purchase

What relevance do these findings have?

If w e are looking at economic decision making w e might be basing our understanding on a model of rational decision making - maximising utility w ith the constraint of a limited income. How ever, this might not be the case in reality. The expectations that w e might have about a purchase might trigger behavioural or affective (to do w ith emotions) responses w hich might influence w hat w e eventually end up buying. The findings might be related to a w ide range of decision making including how w e choose to buy insurance and assurance, gambling at casinos, at racing and so on and how w e pay for goods and services. There is a suggestion, for example, that the perceived risk associated w ith buying goods and services through credit cards is different to that of cash. It has been suggested that w e are 'anaesthetized' against the effects of paying. As a result there may be a tendency to overspend w hen purchasing w ith credit cards compared to cash. There may also be similar effects going on w hen people purchase online rather than going to a shop or a store. By understanding how the brain w orks in this respect, there may be possibilities of building incentives or disincentives to purchase to take account of the w ay these parts of the brain w ork. In making purchasing decisions, w e know that there are a number of 'law s' of economics that w e might quote. Such 'law s' allow us to be able to make predictions - the very basis of having theories. How ever, if these law s are based on inaccurate or incomplete know ledge of how humans actually carry out these actions then the model w ill not be able to be used as a predictive tool. We assume, for example, that humans are attracted to preferred products (how that preference is generated is another story). We also assume that consumers prefer low er prices than higher prices and that if a price is deemed 'excessive' then w e w ill avoid purchasing the item. Prices represent a potential gain and a potential loss. How ever, w e might view similar losses and gains in different w ays. In some cases w e might view a loss as being more important than a gain even if they w ere of equal magnitude. That contradicts the rational approach that characterises much of economic theory.

The two vehicles may stir up different patterns of brain activity and influence our perceptions of loss and gain - even if the prices are very different. Copyright: Biz/ed team.

If our decision-making is being affected by the activation of these distinct neural circuits then the extent to w hich they are activated might influence our choice. For example, the research cited examples w here men w ere show n pictures of sports cars and other types of car deemed to be

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07/07/2010 The Brain and Choice less desirable. View ing sports cars produced a greater degree of brain activity in the mid-brain. Similar results have been obtained in cases w here both men and w omen are show n preferred rather than less preferred drinks, brands of beer and coffee.
If this is the case, then it might suggest that advertising over a long period of time might have significant effects in influencing our choices if it has effects on our perceptions of preferred or non-preferred purchases. What is happening is that the perception of loss and gain is being altered in relation to the price that is being charged.

Task:
Your task is to produce a presentation that explores some of the issues highlighted in this article. Find a selection of w ell know n products and the adverts that are associated w ith them. Consider the main features of the advertising used - w hat are the key messages that the adverts are trying to convey in your opinion? Consider the prices that are being charged for the goods you have selected. How do these prices affect the anticipated gains and losses that might be associated w ith a decision to purchase the item concerned? Finally, in your presentation, discuss the impact of the research into the w ay in w hich advertisers might represent their products and services. How important might price be in determining purchasing decisions in the light of the research and your discussion of the role of advertising?

References
Huhnen, C.M. and Knutson, B. (2005) The neural basis of financial risk taking. Knutson, B. Rick, S. Elliott Wimmer, G. Prelec, D. and Loew enstein, G. (2007) Neural predictors of purchases. Neuron (53) 147-156.

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