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Figuring out decision making
« on: 2004-08-03 07:28:30 » |
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Despite several sloppy or plain wrong technical points, this article has a very interesting interdisciplinary scope.
Mind Reading
The new science of decision making. It's not as rational as you think.
By Jerry Adler
Newsweek International, Aug 9 2004
http://msnbc.msn.com/id/5570554/site/newsweek/
In the control room next door are Steven Quartz, a Caltech neuroscientist, and Colin Camerer, an economist, who are looking inside my brain to help understand some of the most vexing problems in postmodern society—irrational market bubbles, intractable Third World poverty and loser brothers-in-law who want to borrow $5,000 to open a franchised back-rub parlor. My brain was helping science explain why, despite centuries of progress in economic theory since Adam Smith, actual human beings so often refuse to behave as equations say they should.
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Economists have many ways of demonstrating the irrationality of their favorite experimental animal, Homo sapiens. One is the "ultimatum game," which involves two subjects—researchers generally recruit undergraduates, but if you're doing this at home, feel free to use your own kids. Subject A gets 10 dollar bills. He can choose to give any number of them to subject B, who can accept or reject the offer. If she accepts, they split the money as A proposed; if she rejects A's offer, both get nothing. As predicted by the theories of mathematician John Nash (subject of the movie "A Beautiful Mind"), A makes the most money by offering one dollar to B, keeping nine for himself, and B should accept it, because one dollar is better than none.
But if you ignore the equations and focus on how people actually behave, you see something different, says Jonathan D. Cohen, director of the Center for the Study of Brain, Mind and Behavior at Princeton. People playing B who receive only one or two dollars overwhelmingly reject the offer. Economists have no better explanation than simple spite over feeling shortchanged. This becomes clear when people play the same game against a computer. They tend to accept whatever they're offered, because why feel insulted by a machine? By the same token, most normal people playing A offer something close to an even split, averaging about $4. The only category of people who consistently play as game theory dictates, offering the minimum possible amount, are those who don't take into account the feelings of the other player. They are autistics.
The fMRI machine shows how all this works inside the brain. A low offer stimulates activity in the brain's insular cortex, a relatively primitive region associated with negative emotions including anger and disgust. This appears to compete with the more highly evolved prefrontal cortex, the locus of the rational impulse to take the dollar and go buy a soda with it. The more activity in the insular cortex, the more likely subjects were to reject the offer. This is a big step toward being able to see on a screen what people actually want, rather than what they say in focus groups or interviews. Would brain-scan-assisted matchmaking or employee headhunting be more efficient than the way these have been carried out until now? Or would the fMRI merely ratify the judgments of intuition? Psychologists can hardly wait to find out.
And for their part, economists can hardly contain their glee at the research horizons this opens up. "Imagine if you could go on the floor of the stock exchange and see what was going on in traders' brains," says Camerer. "We kept hearing during the bubble that people were behaving as if they were in a delusional state. Well, were they or weren't they?" People don't save enough for their retirements because of a phenomenon known as forward discounting: they value money more in the here and now than 20 years down the road. If we could understand how this process works in the brain, says Paul Glimcher, a leading neuroscientist at New York University, we would have a head start on figuring out how to overcome it.
<snip>
To illustrate how monkeys make economic decisions, Glimcher's former colleague Michael Platt, now at Duke, has investigated how they value status within their troop. Male monkeys have a distinct dominance hierarchy, and Platt has found they will give up a considerable quantity of fruit juice for the chance just to look at a picture of a higher-ranking individual. This is consistent with field observations, Platt says, which have found that social primates spend a lot of time just keeping track of the highest-ranking troop member. It isn't known exactly why monkeys do this, but the finding might help explain the behavior of human beings who pay $1,000 just to sit in a hotel ballroom with the president. You can draw whatever conclusion you choose from Platt's finding that there is no quantity of juice sufficient to get a male monkey to look away from the hindquarters of a female in estrus.
Glimcher is trying to piece together the building blocks of economic choice in the brain, starting at the most basic level of a single neuron. In weighing options—a gamble on a roulette wheel, say, or the purchase of a bond—economists invoke the concept of "expected value." It is the potential payoff of a given course of action, multiplied by the chance of collecting it. Hence the expected value of flipping a coin to win $1 is 50 cents. A more sophisticated mathematical function called "expected utility" takes into account most people's inborn aversion to risk, and appears to more accurately reflect how people actually make these choices. Tossing a coin for $10 million or getting a guaranteed $5 million both have the same expected value, but a different expected utility—and most people who aren't already millionaires would take the sure thing. (Or so economists believe. No one has come up with the funding to test the hypothesis.) In his monkey research, Glimcher has isolated individual neurons that fire in response to the expectation of getting a drink of juice. By manipulating the odds of getting the drink and the size of the drink, he has shown that the rate at which these neurons fire is proportionate to the expected utility of the juice payoff. The implication is electrifying, especially to economists: an abstract, mathematically derived formula appears to be literally hard-wired into the primate brain.
<snip>
(The description of a game snipped here -- rhinoceros)
So here was my strategy. In total defiance of the social norms that should incline me toward cooperation and trust, I pursued the single-minded goal of amassing as many points as possible. Recognizing that the more I invested the more money there would be for both of us to split, on each round I sent all $10 to my counterpart, who routinely returned $16 (of $30) to me—just enough over half to keep me going.
That is, until the ninth round, when, I calculated, the other subject could come out ahead by keeping the whole $30. So I got there first: I "invested" zero. I did the same on the last round and cleared a hypothetical $148 ($16 times eight rounds, plus $10 times two rounds) to her (or his) $112 ($14 times eight rounds). And I pulled off one more coup: I figured out, correctly as it happened, that I was playing against a woman. I reasoned that a man would have been just as competitive as I am, and guessed that I was going to betray him on the ninth round—so he would have kept all $30 to himself on the eighth round. (At least, most of the ones I know would have.)
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