Behavioural finance, the examination of how willpower, concern for other people, limits on calculating ability, and biology influence economic behaviour is now well accepted in institutional investing. But the latest development in behavioural finance – neuroeconomics, which looks at how the study of the brain fits within this – is taking experimental economics to a new level.
In American colleges, finance and psychology undergraduates are being tied up to functional MRI scanners which allow pictures of the brain to be taken on an interactive basis. They are then asked simple bargaining questions in order to test economic theories, and at the same time measure biological and neural processes.
According to Steve Utkus, director of Vanguard’s US Centre for Retirement Research, it is revealing that different areas of the brain are triggered when the students are asked to think about savings and spending. The advanced portion of the human brain, the prefrontal cortex, lights up when people think about savings. That is, when specifically asked to think about our future, our evolutionary brains think about our well-being.
However when short-term gratification is at stake, we start salivating, and the dopamine system, or midbrain, lights up. This is the same part of the brain we share with lower order mammals, Utkus said. Or in other words, the same part of the brain that lights up when a dog is given a bone.