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Anatomy of Give and Take

Economic theory goes only so far in explaining why people buy, sell, save or trust. Scientists are looking inside the mind for answers.

March 18, 2005|By Robert Lee Hotz | Times Staff Writer
  • Brooks King-Casas, left, Read Montague, center, and Damon Tomlin, of Baylors Human Neuroimaging Laboratory, are working with Caltech researchers on the largest interactive brain-imaging study ever.
Brooks King-Casas, left, Read Montague, center, and Damon Tomlin, of Baylors… (Brett Coomer / For The Times )

HOUSTON — The two women had money in mind.

Phuong Tang, 25, wriggled into a $2.5-million brain scanner at Baylor College of Medicine. Across the hall, a technician loaded Tang's trading partner for the day — Kavita Belur, 26 — into the bore of a similar machine, like a fresh artillery shell.

The two strangers were speculators in a marketplace of the mind, locked in a mutual struggle for financial gain. Belur played an investor, Tang the trustee of an investment fund.

As the pair wavered between cooperation and betrayal, scientists recorded how their brains changed. The researchers hoped to discover the secret of trust — the human variable missing from the mathematics of modern economics.

The terms of the experiment were simple: At the beginning of each round, Belur could put up to $20 in play. Any investment automatically tripled. Tang then decided how much to return and how much to keep.

Belur's safest strategy was to hoard all of her money. Tang's most logical move was to cheat her partner at every opportunity.

There was a riskier but potentially more profitable way.

They could trust each other.

The experiment was part of a new frontier in the exploration of the brain — a field called neuro- economics that seeks to understand the biology underlying economic behavior.

In universities and research centers across the country, scientists are probing the brain with coin flips, $5 bills and gift certificates from Bit by bit, they are assembling a mosaic of the financial brain, identifying how competing neural circuits shape decisions.

"We have started looking for pieces of economic theory in the brain," said New York University neuroscientist Paul Glimcher.

Researchers believe they can discover how neural networks affect the ways people buy and sell, splurge and save. They hope one day to understand how decisions percolating through the brains of billions of people, often acting at cross-purposes, interact to chart the course of financial markets and national economies.

Inside the scanner, Belur made up her mind.

She decided to gamble her entire nest egg on her trustee's goodwill.

She pushed the button, putting her money in play.

* * * * *

With the ritual clang of the opening bell one day in February, the five trading floors of the New York Stock Exchange abruptly surged in a whirlpool of profit and loss.

Hundreds of brokers waved cellphones, fingered small computer keypads and placed their clients' orders. Fortunes winked into existence and just as quickly vanished.

In all, about 1.6 billion shares — worth about $46 billion — changed hands during the day in a ripple of deals coursing through the global equities market. The daily behavior of buyers and sellers is so complex that even experts in chaos theory have been unable to discern a predictable pattern.

In virtually every area of markets, human behavior has economists stumped.

"We don't know why stock prices go up and down," said Caltech economist Colin Camerer. "We don't know why savings rates are so dramatically different in different parts of the world. We don't know why there is labor market discrimination."

People trust other people when economic theory says they should not. They cooperate when betrayal seems more rational. They gamble foolishly, overestimating risk when they are losing, and underestimating it when they are winning. They spend too much and save too little.

Economists know all this from personal experience, but they don't know how to factor the quirks of human behavior into their mathematical models. This is no small matter. Efforts to set interest rates, revamp health insurance, privatize Social Security, revise pensions, police the sale of securities and alter legal liability rules rely to some degree on economists' ability to make reliable predictions about the choices people will make.

"Economics has hit the wall," said Andrew Lo, director of MIT's laboratory for financial engineering. "It has explained about as much as it can with the tools it has. There are too many inconsistencies between theory and data."

Pioneers in neuroeconomics believe the key to understanding economic behavior lies deep in the brain, at the level of cells and synapses.

The brain is above all an economic engine forged by evolution through eons of scrounging for scarce resources, they argue. So the ability to trade things of value is the defining characteristic of the brain, the keystone of human character.

"Trade preceded agriculture; it preceded cities; it is a major component in human sociality. More than anything, it explains our success as a species," said Vernon Smith, an economist at George Mason University whose work in experimental economics earned him a Nobel Prize in 2002.

Some experts suggest that stock markets and other financial exchanges, as creations of the human intellect, may mirror the biological networks in the brain.

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