the brain and choice

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Mind Your Business - 14 May 2007

The Brain and Choice

You go to a shop to buy a bottle of drink. You are faced with an array of different products

aligned in the shop cooler. You scan the shelves taking in the different products on offer and

also taking note of the prices. A bottle of coke is 65p, Sprite, 69p, Pepsi 60p, 7-Up, 64p and

Lucozade Isotonic 75p. Which do you choose?

Lots of choices, lots of prices, - which do you choose and what role does the brain play in making that

choice? Copyright: Robert Aichinger, from stock.xchng.

Any student with knowledge of business or economics would be able to tell quite a story

about this seemingly simple activity. To the student of economics, the issues would centre on

scarcity, choice, opportunity cost and value.

The scarcity element defines the limited incomes that we possess in relation to our wants

and needs; the choice relates to how we allocate that scarce resource (defined as income in

this case); the opportunity cost is what we are sacrificing in making that choice and finally,

the value is related to a whole host of quite complex things associated with our personalperceptions, which might include taste, the image we want to project about ourselves, how

we view shapes, packages, perceive messages and logos and so on.

The business student might be interested in any or all of the following:

The process by which each firm that produces the drinks are attempting to persuade us

to buy their product rather than any of the others

The prices that have been set by the retailer

Where they are positioned in the store

The way they are packaged and promoted

The costs of producing the items and how they were producedThe added value offered by each drink

Ultimately, however, you make a choice and buy the Lucozade Isotonic. In some respects the

choice might seem strange - the drink will do its job of satisfying thirst but so would all of the

others. The fact that it is priced higher than the rest might lead us to asking questions about


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why you made that choice rather than going for the cheapest drink on the shelf. There must

have been other reasons and factors that went into the making of that particular choice.

In economics and business studies, the reasons for decision making are the subject of much

interest. Do we make decisions based on rational behaviour - seeking to maximise utility

(satisfaction) given the constraint of limited incomes? Or do we make decisions on the basis

of risk - are we risk-averse or risk-seeking?

How we view risk is an important part of decision-making - something that has been given greater

prominence in economics in recent years. How far we understand the role that risk plays in decision-

making is still to be determined. Copyright: Charles Thompson, from stock.xchng.

Businesses will be interested in why people make decisions on purchases because it gives

them more information on which to base their marketing and pricing decisions. For

businesses, understanding the decision-making process might be an important part of the

design and execution of advertising. Does advertising actually work? If so, how does it work?

Is the effect of an advert immediate or longer term? How do humans react to the constant

reminder about products that we experience everyday? How can a business make itself and

its message and identity stand out from the mass of information that we are bombarded w ith

every day?

Making decisions on purchases, how and why we choose to

buy the things we buy, might be far more complex than we

imagined. The world of neuroscience is starting to offer up

more insight into the decision-making process. Over the last

ten years, our knowledge and understanding of how the

brain works has grown massively. You may have been

exposed to the periphery of this new research in schools andcolleges where 'brain-based learning' has become quite

fashionable.

Making decisions is an everyday part of life - in many cases we

make these decisions subconsciously, but the complexity of the

thought process and brain activity associated with it might be

something we are not aware of. If we knew more about the role of

the brain in decision-making then we might be in a position to

influence purchasing decisions. Copyright: Steve Woods, from

stock.xchng.

Sadly, much of the work that has permeated into education

represents a simplified and often mechanistic view of thehuman brain. The 'left brain - right brain' notion provides

some insight into different functions of the brain but is a far

too simple representation of how the brain works.

The brain has around one hundred billion cells (neurons). Brain cells make links that form

neural pathways and it is these links that help us to learn. It is estimated that there might be




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as many as one hundred trillion such neural links although others have put the figure much

higher - 1 with millions of zeros after it. The number of neural links has been likened to trying

to imagine a ll the trees in the Amazon rainforest as the number of neurons and the number

of leaves on every tree in the rainforest as the number of neural connections. When we are

dea ling with these sorts of numbers, the simplification of the brain's functioning is put into

some sort of context!

MRI scanning has improved our ability to understand how the brain works. We have learnt more in the

last ten years than in the previous 100! Copyright: Max Brown, from stock.xchng.

Much of the new research into how the brain works has been boosted by the development of

magnetic resonance imaging (MRI) technology. This technology allows us to be able to gain a

greater understanding of the complex processes that are involved in normal human activity.

Different parts of the brain can be shown to be more active in certain types of human

physical and mental activity than others and whilst we still have much to learn about the

brain, the leap in our understanding has not only helped the medical profession but also

business and economics.

There is now a growing branch of both subjects that uses the research into the brain to help

build understanding of how we behave. This branch is referred to variously as

neuromarketing or neuroeconomics. This MYB will look in a bit more detail at some research

into how we make purchasing decisions and how this research might be used in business

and economics.

Theory

Everything we do as human beings has something to do with the brain. The most involuntary

reflex through to the carefully calculated decision is all channelled through our brains. Its power

and capacity puts the most sophisticated computers to shame. Whilst our understanding of the

brain has risen exponentially, we still only understand a fraction about how it works. The

complex chemical and electrical processes that go into any action are at a very early stage in our

understanding. What we do know is that a better understanding of the brain could help us

understand so much more about economics and business.




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A greater understanding of the brain is helping us understand how we make purchasing decisions.

Copyright: Rodrigo Galindo, from stock.xchng.

Part of the way this might work is through building models that help to give us some

understanding of the role of the brain in things like decision-making. Models are useful in that

they might provide a means to understand a process and in so doing allow us to be able to offer

some predictions about how humans might behave in certain situations and in particular

circumstances and contexts. The power of these models to predict behaviour accurately and

consistently relies on the quality of the information that we are able to input into the model.

This is where magnetic resonance imaging might help to provide some of the answers. Two

pieces of research that we w ill be referring to focus on work by psychologists and

neuroscientists in the United States. In one piece of research, the investigators looked at the

role played by different areas of the brain in making decisions about investing in financial assets.

In the other, the researchers looked at the role of the brain in making purchasing decisions

related to preference and price. The latter research focused on the choice of consumers in

purchasing chocolate.

In both cases, the research was investigating how we balance out our anticipation of the gains

and losses that we might get from purchases and whether there was any part of the brain that

was associated w ith being stimulated when faced with the likely gains and losses of a

prospective purchase.

The principle behind this investigation was based on the anticipatory effects that we get when

faced with a purchasing decision. It is not difficult to conceptualise on a personal level. Think

about a time when you go into a shop or a store and see something you really like. It might be

an expensive purchase and you might know that you should not really be thinking of buying it

but the item has really caught your attention and you are debating whether to buy it or not.

On the one hand, you know that the price that is being asked represents a loss - the money you

will have to give up is an opportunity cost and means you w ill have to sacrifice other things thatit could also buy you. Equally, you also know that owning this item will provide you with some

form of gain - satisfaction. When making the purchasing decision, therefore, you are balancing

out these competing forces. The brain plays a role in this (obviously) but exactly which part of

the brain is involved and whether it can help us predict behaviour is another matter.

There seems to be two main parts of the brain that are involved in such decisions - the nucleus

accumbens and the anterior insular. The nucleus accumbens emits two neuro transmitters -

dopamine and serotonin. The former is associated with desire and the latter w ith inhibition.




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Image taken from The Brain from Top to Bottom under copyleft.

The anterior insula is a part of the brain that has some association with emotional experience

and conscious feelings. This will include feelings of pain, anger, happiness, disgust, fear andanger.

Image from Wikimedia Commons.

The researchers were trying to find out what role these two parts of the brain play in decision

making. The research was relatively complex but the main results from their investigations are

given below.

When making decisions on financial instruments, investors tend not to act rationally.

These can be called 'risk seeking mistakes' and 'risk aversion mistakes'.

Activity in the nucleus accumbens has an association with risk seeking mistakes and risky

choices




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Activity in the anterior insula is associated with risk-aversion mistakes and riskless choices

Distinct neural circuits associated with anticipatory affect lead to different types of choices

Nucleus accumbens activation represents gain prediction

Anterior insula activation represents loss prediction

Activation of these brain regions can predict decisions to purchase

What relevance do these findings have?

If we are looking at economic decision making we might be basing our understanding on amodel of rational decision making - maximising utility with the constraint of a limited income.

However, this might not be the case in reality. The expectations that we might have about a

purchase might trigger behavioural or affective (to do with emotions) responses which might

influence what we eventually end up buying. The findings might be related to a wide range of

decision making including how we choose to buy insurance and assurance, gambling at casinos,

at racing and so on and how we pay for goods and services.

There is a suggestion, for example, that the perceived risk associated w ith buying goods and

services through credit cards is different to that of cash. It has been suggested that we are

'anaesthetized' against the effects of paying. As a result there may be a tendency to overspend

when purchasing with credit cards compared to cash. There may also be similar effects going on

when people purchase online rather than going to a shop or a store. By understanding how thebrain works in this respect, there may be possibilities of building incentives or disincentives to

purchase to take account of the way these parts of the brain work.

In making purchasing decisions, we know that there are a number of 'laws' of economics that

we might quote. Such 'laws' a llow us to be able to make predictions - the very basis of having

theories. However, if these laws are based on inaccurate or incomplete knowledge of how

humans actually carry out these actions then the model will not be able to be used as a

predictive tool.

We assume, for example, that humans are attracted to preferred products (how that preference

is generated is another story). We also assume that consumers prefer lower prices than higher

prices and that if a price is deemed 'excessive' then we will avoid purchasing the item. Prices

represent a potential gain and a potential loss. However, we might view similar losses and gainsin different ways. In some cases we might view a loss as being more important than a gain even

if they were of equal magnitude. That contradicts the rational approach that characterises much

of economic theory.

The two vehicles may stir up different patterns of brain activity and influence our perceptions of loss and

gain - even if the prices are very different. Copyright: Biz/ed team.

If our decision-making is being affected by the activation of these distinct neural circuits then the

extent to which they are activated might influence our choice. For example, the research cited

examples where men were shown pictures of sports cars and other types of car deemed to be




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less desirable. Viewing sports cars produced a greater degree of brain activity in the mid-brain.

Similar results have been obtained in cases where both men and women are shown preferred

rather than less preferred drinks, brands of beer and coffee.

If this is the case, then it might suggest that advertising over a long period of time might have

significant effects in influencing our choices if it has effects on our perceptions o f preferred or

non-preferred purchases. What is happening is that the perception of loss and gain is being

altered in relation to the price that is being charged.

Task:

Your task is to produce a presentation that explores some of the issues highlighted in this

article.

Find a selection of we ll known products and the adverts that are associated with them.

Consider the main features of the advertising used - what are the key messages that the

adverts are trying to convey in your opinion?

Consider the prices that are being charged for the goods you have selected. How do

these prices affect the anticipated gains and losses that might be associated w ith a

decision to purchase the item concerned?

Finally, in your presentation, discuss the impact of the research into the way in which

advertisers might represent their products and services. How important might price be in

determining purchasing decisions in the light of the research and your discussion of the

role of advertising?

References

Huhnen, C.M. and Knutson, B. (2005) The neural basis of financial risk taking.

Knutson, B. Rick, S. Elliott Wimmer, G. Prelec, D. and Loewenstein, G. (2007) Neural

predictors of purchases. Neuron (53) 147-156.



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