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SALT LAKE CITY — When it comes to money, just what are people thinking? A lot of economists would like to peer inside people’s heads to figure that out. Peter Bossaerts does exactly that.
The economics professor — who, until recently, held a post at the University of Utah — studies what’s been called neuroeconomics by examining the brain with MRI machines and other instruments.
He wants to know how the brain deals with risk and uncertainty.
For instance, scientists have long known about what’s called the “sunk cost fallacy,” the tendency to stick with something the more you’re invested in it.
That’s why you may hold onto a car that’s not worth keeping — it’s already cost you a fortune in repairs. That’s why you try to eat your money’s worth at the buffet, even though you’re full. That’s why people hold onto losing investments — the original cost is stuck in their brains.
“They could not get themselves from remembering what price they bought it at,” Bossaerts says. “They should have ignored the price that they bought it. That signal, that price signal, is so strong in their brain that it basically overrules the rational thinking about the situation.”
Bossaerts saw this same effect in test subjects trading imaginary securities while their heads were being scanned by MRI machines. The prices of those losing investments were stuck in their brains and, Bossaerts says, he could see exactly where they were stuck — in the striatum.
“It's a subcortical structures part of your rat brain or a very primitive rat brain and it's a structure we associate with reward processing and processing of losses,” he says.
Bossaerts has studied market bubbles, surges of prices far beyond what assets are worth, such as the dot-com bubble of 2000 and the housing market bubble six years later.
He says studies show the people who jump on bubbles are not those who follow the herd, but individuals with very good social cognition.
“They're not the trend followers,” he says. “They're very good at figuring out what the intentions of others are, which serves them very well when they play complicated games — bridge or poker or something like that — but in this particular setting, they see these prices that are deviating from what it should be and they think there must be something going on. They tried to read the market and read it in the wrong way.”
“We are social animals,” he says. “The brain is very well-adapted to playing games.”
The point of these studies, he says, isn’t to rewire the brain, but to somehow adapt the markets to the way we think.
“The big question is how unadapted is the human brain to financial risks and can we do something about the financial risks so it becomes much more like the risk we understand,” he says.
Bossaerts, who is originally from Belgium, worked at the Utah Laboratory for Experimental Economics and Finance at the University of Utah until late last year. He has since moved to the University of Melbourne to continue his research.
With more than 30 years in broadcast journalism, Peter Rosen is a reporter, producer and editor. He's won the National Press Photographers Association Reporting Award, as well as national NPPA editing and photography awards and six regional Emmys.
