Page last updated at 22:38 GMT, Monday, 27 October 2008

Where economics meets neuroscience

By Tim Harford
Money on the Brain, BBC Radio 4

Is a stock market bubble a medical condition?

Tim Harford being studied by a neuroeconomist
Neuroeconomists study the brain's responses in shops

You might well have thought so, had you taken a walk around a trading floor and looked at the behaviour of traders at the height of the dotcom bubble in 2000.

"They were displaying classic symptoms of mania," says John Coates, recalling his time as the manager of a New York trading floor.

"They were overconfident, they had racing thoughts, they had diminished need for sleep and heightened sexual appetite."

But Dr Coates no longer works on Wall Street.

He is now one of a small but growing number of "neuroeconomists" - researchers who study the brain, hormones and nervous system in search of an explanation of our behaviour as investors and shoppers.

Reckless bulls

Neuroeconomics is a new discipline that fuses economics and neuroscience, and its practitioners are people who think that everyday phrases such as "impulse buy", "business brain" and "bull market" are more than just figures of speech.

"A bull market" refers to a long period of rising share prices, but Dr Coates points out that traders behave uncannily like real bulls and other male animals.

A rutting stag, for example, enjoys a testosterone surge if he beats off a sexual rival.

More testosterone means more confidence and more risk-taking, which tends to lead to more victories and yet more testosterone.

Eventually, the cycle comes to an end - often because confidence has turned into recklessness - and reverses itself.

After taking a few saliva samples, Dr Coates has discovered not only that such hormone surges happen to human traders too, but also that they are correlated with risk-taking and short-term profitability.

Powerful magnets

Neuroeconomists have many ways to try to understand the brain.

They can experiment on animals, examine brain-damaged patients, and even inflict temporary brain damage on their subjects.

They can also scan the brain directly.

The most media attention is lavished on a particular type of brain scan called fMRI - scanners that use such powerful magnets that they can tear a set of keys out of your hand - or rip out a body piercing.

Horror stories abound.

That powerful magnet is used to detect the minute magnetic disturbances caused by iron in the blood, showing us which parts of the brain are receiving a stronger flow of oxygen-rich blood.

Tim Harford being studied by a neuroeconomist
The EEG scanner looks like a polka-dot shower cap, punctured by a tangle of electrical cables

But some researchers are sceptical about how useful these scans are.

Gerd Gigerenzer, a leading psychologist from the Max Planck Institute in Berlin, argues that the impressive images that come out of the scans have seduced us into thinking we can see inside the mind.

He compares fMRI to looking at the flow of electricity in a home computer: it doesn't really tell you much about how your internet browser works.

The fMRI pictures, he says, are only popular because they are beautiful, expensive and mysterious.

Alien outfit

An alternative to the fMRI scan is the EEG scanner, which picks up electrical waves from the surface of the brain.

It provides less detail and depth than an fMRI, but is portable enough to wear to the shops.

In true BBC tradition, I was roped in as an EEG guinea pig.

Before long I was walking around a busy shop decked out like an alien from a 1970s episode of Doctor Who.

The EEG scanner looks like a polka-dot shower cap, punctured by a tangle of electrical cables.

I was also equipped with also a heart monitor, a lie-detector, and special spy-glasses with a tiny video camera that recorded whatever I looked at.

This kind of gear can in principle be concealed under hats and coats, but that would have spoiled the fun, wouldn't it?

Neuroprivacy laws

In the long run, neuroeconomics may be no laughing matter. Mind-reading may be science fiction at present, but that may not last.

Paul Glimcher, a neuroeconomist at New York University, points out that, even now, brain scan data can help predict people's choices.

He thinks the technology will become more accurate and much more widespread before long.

"We just have to be realistic that in five years time this will be an everyday event," he says.

He and like-minded researchers are now campaigning for "neuroprivacy laws".

Nobody has ever needed to draft rules regulating the use of mind-reading technology.

It might be a good time to start.

"Money on the Brain", broadcast at 9pm Tuesday 28 October, BBC Radio 4 and at 4.30pm Wednesday 29 October. Tim Harford is a presenter for the BBC and a columnist for the Financial Times.




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