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News

People with damage to the part of the brain that controls emotion make wiser financial choices

Carnegie Mellon Universtity : 08 August, 2006  (Technical Article)
In an intriguing and unusual study, researchers have found that people who have brain damage that impairs their emotional responses can, in certain situations, make better investment decisions than normal people. The paper was published in the June issue of Psychological Science and was co-authored by faculty at Stanford University, Carnegie Mellon University and the University of Iowa.
'It may be the first study that documents a situation in which people with brain damage make better financial decisions than normal people,' said George Loewenstein, a professor of economics at Carnegie Mellon and a co-author of the study. The other co-authors were Baba Shiv, associate professor of marketing at the Graduate School of Business at Stanford University, and Antoine Bechara, Hanna Damasio and Anonio R. Damasio, professors of neurology at the University of Iowa.

This study is part of the emerging field of neuroeconomics, which investigates the mental and neural processes that drive economic decision-making. Based on previous studies, the researchers concluded that the emotionally impaired participants were less averse to risk and thus were more willing to take gambles that had a high payoff. Emotions lead people to avoid risks even when the potential benefits far outweigh the losses, a phenomenon known as myopic loss aversion that scholars have concluded can explain, for example, why people prefer to invest in bonds over historically higher-performing stocks.

'Emotions serve an adaptive role in speeding up the decision-making process. However, there are circumstances in which a naturally occurring emotional response must be inhibited, so that a deliberate and potentially wiser decision can be made,' Shiv said.

The researchers compared three groups of people: those with lesions in brain regions related to emotion; a control group with lesions in brain regions unrelated to emotion; and normal participants with no brain damage. All participants were give $20 in play money, which they were told to treat as real because they would receive a gift certificate for the amount they had left at the end of the experiment. The participants were asked to make several rounds of investment decisions, in each of which they had to decide whether or not to invest $1. If the participant chose not to invest during a round, they kept their dollar. Otherwise, a researcher would flip a coin, in view of the 'investor' to determine the outcome. If the coin came up heads, the participant would lose the $1 they had invested. If it came up tails, then $2.50 would be added to the participant's account. Since the odds of either possibility were 50-50, the best choice, in terms of expected value, was to invest in each round.

The experiment lasted 20 rounds, and when it was over, the emotionally impaired participants had outperformed the two other groups, earning on average $25.70. The normal participants earned an average of $22.80, and the lesion control group earned $20.07. The normal group invested in about 58 percent of the rounds, compared to about 84 percent by their emotionally impaired counterparts.

The study does not mean that it is a good thing to have lesions in emotional regions of the brain. Such patients generally make worse decisions than those with intact brains. In this experiment, risk-taking was the most advantageous behavior, so the participants who were less fearful made better choices. However, in other studies, the experiment has been set up so that risky choices had lower expected values, and in these studies, normal subjects tended to perform more optimally. Emotions clearly play an important role in human life; this study suggests, however, that there are situations in which they can lead us astray.
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