Coined: The Rich Life of Money and How Its History Has Shaped Us

by Kabir Sehgal

  Richard Thaler, Daniel Kahneman, Amos Tversky, and other behavioral economists have made important contributions to our understanding of human behavior as it relates to money. But their findings only go so far—and don’t fully explain what’s going on in the mind to direct these behaviors. To continue our quest to understand money in new ways, we must go inside the black box of the brain.

  Brain Man

  Brian Knutson (pronounced Kih-NOOT-suhn) is a man on a mission: to understand how the brain makes financial decisions. A professor of psychology and neuroscience at Stanford University, he is one of the most visible and important neuroeconomists. Neuroeconomics is an interdisciplinary study of how the brain makes financial decisions. If one were to take attendance at a neuroeconomics faculty meeting, present might be neuroscientists, behavioral economists, “traditional” economists, psychologists, biologists, chemists, and computer scientists. The various approaches are helpful because trying to understand how we make certain decisions can be incredibly complex.

  The interdisciplinary nature of neuroeconomics is a good reminder that humans make financial decisions for a variety of reasons. Since we gained the capacity for advanced thought, we like to think that our decisions are processed in the neocortex, the seat of our consciousness. But it’s the subconscious, System 1, that works on autopilot and navigates many financial decisions without our fully realizing it.

  Not only are many of our financial decisions made subconsciously. Our motivations may also be driven by forces of which we aren’t fully aware. In one British study involving money, eighteen participants were instructed to press a handgrip. But first they were shown the images of a coin of low value, a penny, or a coin of a higher value, a pound, signifying the amount they could win. They would receive money proportionate to how hard they squeezed the grip. In some cases, the displayed image lasted until the participant was conscious of which coin it was. In other cases, it was flashed too quickly for the participant to be fully aware, confirmed by the fact that they self-reported that they couldn’t identify which coin was displayed. Despite not being consciously aware of which coin was at stake, participants still squeezed harder for the higher-valued coin.54 The subconscious was still able to register how much was at stake.

  The money also induced a physiological change among the participants. Researchers found that the skin conductance of participants increased when the higher-value coin was displayed. In another study, one group of university students was asked to count eighty $100 bills, the other group eighty pieces of paper. Some students from both groups were instructed to place their hands in water heated to 122 degrees Fahrenheit. Those that handled money reported that the water wasn’t as painful as those who counted paper.55 These findings indicate that the thought and the touch of money alter our physiology in seemingly imperceptible ways.

  But what’s going on in the brain during these experiments? In the handgrip study, researchers used brain scans to discover that the ventral pallidum (which is part of the ventral striatum that includes the nucleus accumbens) registered more activity when a pound was displayed, and seems to be the part of the brain that supports conscious and subconscious motivation. They conclude that the “human brain is able to translate expected rewards into physical effort, without the need for the subject’s awareness.”56 Money is motivating us to act, shaping our decisions and behavior without our fully realizing it.

  “MRIs are a game changer,” says Knutson. Functional magnetic resonance imaging (fMRI) measures the oxygen usage of the surrounding cortical tissue; brain cells need oxygen to work.57 Using this technology, neuroeconomists can look deep into the brain, in the “subcortical” level, below the cortex, to see what’s happening when we make financial decisions. The New York Times describes the range of activities that neuroeconomists have examined with brain imaging: “These researchers are busy scanning the brains of people as they make economic decisions, barter, compete, cooperate, defect, punish, engage in auctions, gamble and calculate their next economic moves.”58

  I’ve already discussed how neuroeconomists have conducted a variety of experiments to determine the neurological underpinning of the money illusion, loss aversion, and subconscious financial motivation. They’ve even studied what happens in the brain when money is destroyed. Researchers scanned the brains of twenty participants while watching videos of paper money and regular paper being folded and torn. When participants saw money being destroyed, there was heightened activity in the temporoparietal network of the brain, which activates when using tools like screwdrivers, hammers, or knapping hand axes. Money of higher denomination generated more neural activity, too.59 The researchers say, “This lends plausibility to a genuinely psychological interpretation of the explanation of money as a tool… The fact that the brain does treat money as a tool for tracking exchange on a precise scale suggests that a tool explanation of money is more than just a useful metaphor.”60

  Despite these intriguing findings, we are still in the beginning stages of neuroeconomics, and there is much more to learn about how the brain processes money. There are about 100 billion brain cells, known as neurons, in the human brain. A neuron fires when it receives impulses that excite it.61 Neurons translate this firing into chemical signals that can excite other neurons by traveling across small spaces between them known as synapses, which are like swapping stations where messages are relayed. With an average of five thousand synapses per neuron, there are approximately 500 trillion synapses overall.62 The links between neurons are critical to storing and facilitating knowledge, such as how to use money. Incredibly, more information is processed in one brain than on the Internet.63 Just as the links between websites can change, so, too, can the neurons involving money be rewired to recognize salt, gold, dollars, or almost anything as a currency. This is known as neuroplasticity, the brain’s ability to make new connections. When neurons fire together, they are said to wire together.64

  During childhood, we learn about money as a symbol of value, maybe through formal instruction but more likely through observing a parent. Some neurons fired when you saw your mother buy milk with dollars. Over time, the brain associated money with what it could obtain. Developmental psychologists Stanley Greenspan and Stuart Shanker have studied infants to see how they create symbols. One of the conditions they found necessary to “create a meaningful symbol” was that it must be “invested with emotions.”65 Without emotions, symbols are just images. Mom isn’t just a tall lady with long brown hair; she provides comfort through food and shelter. A dollar bill isn’t just paper with green ink. It’s what you give to your kids to reward them for doing their chores, or it’s how you insult someone when you give too little a tip. Money isn’t just the output of logic and reason; it brims with emotional meaning. They found that children learn to imbue images with additional meaning, turning them into symbols that are “seasoned with more… emotional experiences.”66

  The topic of emotions and decisions is what led Knutson to become a neuroeconomist. As a graduate student, he was already studying facial expressions and emotions when one of his advisers suggested that he dig deeper into how the brain processes feelings. Thus began his career in affective neuroscience, or the neurological aspects of emotion. During his postdoctoral fellowship at the National Institutes of Health, he worked with brain imaging techniques and realized that they could provide a glimpse into how the brain functions. He always had an interest in the cognition of emotions, and now he had the capacity to see what is really happening in the black box of the brain. I learned about Knutson’s story from him. He joined me for dinner in New York and navigated me through the complex field of neuroeconomics. He boiled down his research into two questions that guide his work:

  1. Which brain mechanisms anticipate good and bad events?

  2. Does their activity influence choice?

  The first question is an anatomical one. He wants to know which regions of the brain activate when it anticipates a positive or a negative event. By us
ing brain scans, he can see which regions are correlated with each event. Neuroeconomists have found that the nucleus accumbens activates when anticipating a gain, while the anterior insula also activates at the prospect of loss.

  In an experiment, Knutson and his team scanned the brains of eight participants while they were presented with the prospect of winning or losing money. The opportunity of receiving cash presumably would increase dopamine levels, a neurotransmitter linked with excitement, in the nucleus accumbens of participants.67 Accordingly, the mere anticipation of making money led to a surge of activity in this region. Financial writer Jason Zweig visited Knutson in his Stanford laboratory and underwent a similar experiment, which he describes in Your Money and Your Brain: “In fact, Knutson’s scanner found, the neurons in my nucleus accumbens fired much less intensely when I received a reward than they did when I was hoping to get it.”68 The idea of gaining money is more of a neural stimulant than money itself.

  It’s almost as if the thought of obtaining money induces a “high,” like a drug. Neuroscientist Hans Breiter and his research team looked into this comparison. They scanned the brains of twelve people while they played a game in which the dozen could win or lose money. The scans show heightened activity, again, in the nucleus accumbens but also in other regions. Remarkably, the brain images were similar to those of drug addicts who were given a hit of cocaine.69 Zweig writes that “the neural activity of someone whose investments are making money is indistinguishable from that of someone who is high on cocaine or morphine.”70 One doesn’t have to take harmful chemicals in the form of drugs to generate heightened activity in the nucleus accumbens. Knutson has found that the prospect of winning money is incredibly stimulating: “We very quickly found out that nothing had an effect on people like money—not naked bodies, not corpses. It got people riled up. Like food provides motivation for dogs, money provides it for people.”71 Money has become our Pavlov’s bell, activating the nucleus accumbens and conditioning our behavior as we salivate at the opportunity to feast on more.

  Researchers have found that the anterior insula, in the middle of the brain, fires at the prospect of loss. Researchers scanned the brains of nineteen participants while they were given various ultimatums related to an amount of cash. During each trial, there were two participants: the proposer, who makes an offer on how to split the money, and the responder, who decides whether to take the proposal. The researchers state that the “standard economic solution” would be for the proposer to offer a low quantity, and the responder to consent, since some money is better than no money.72 But they found that low offers, approximately 20 percent of the total amount, are rejected 50 percent of the time. Even though the responders knew that by rejecting these offers neither participant would receive any money, they still refused, which demonstrates there is a powerful force guiding their decisions. The responders were reportedly insulted and angry with the low, perceived-to-be-unfair offers. By rejecting these offers, the responder penalizes the proposer and nobody receives money. From an evolutionary standpoint, rejecting the offer may be a way to maintain status in a community as someone who should not be mistreated.

  The brain scans reveal that the dorsolateral prefrontal cortex activates when a responder receives an offer. This part of the brain is usually linked with deliberate, conscious thought. However, the anterior insula fired when the responder received an unfair offer. This region of the brain is often linked to negative emotions and activates when experiencing pain, disgust, humiliation, thirst, and hunger. Zweig notes that the insula is full of spindle cells, which have a molecule that’s found in lesser amounts in the brain than in the human digestive system, which bring about contractions to process food: “When you get a ‘gut feeling’ that an investment has gone sour, you might not be imagining. The spindle cells in your insula may be firing in sync with your churning stomach.”73 The responders who had higher activity in their anterior insula rejected unfair proposals with greater frequency.74 It’s as if the insula overrides the prefrontal cortex, emotions trumping reason. This study illustrates what behavioral economists have long observed: that our financial choices are influenced by other factors beyond pure reason. Thanks to brain imaging, now we can see the neurological underpinning of how one of those factors, emotions, influences financial decisions.

  Knutson makes the case that emotions are key to understanding financial decision making when he writes, “Some still assume that emotion is peripheral, but the time has come to recognize that emotion is central… Emerging physiological, behavioral, and neuroimaging evidence suggests that emotions are proactive as well as reactive.”75 He has found that positive emotions promote risk taking, and negative emotions induce risk aversion.76 In one of his studies, fifteen heterosexual males were shown a picture and then asked to make a high-risk or low-risk financial gamble. The pictures consisted of positive stimuli, like erotic images that induced excitement, negative stimuli of snakes and spiders, and neutral ones of household appliances. Sure enough, the positive stimuli increased activation in the nucleus accumbens and financial risk taking.77 The study shows that incidental cues can influence financial decisions and that emotions should be taken into account when one is trying to predict human behavior.

  It’s one thing to observe which regions of the brain are activated; it’s quite another to forecast human decisions. In 2004, an editorial for Nature Neuroscience read, “Cognitive science is not yet close to explaining or predicting human decision-making in the real world.”78 That may have been the case at the time, but Knutson has found that one can predict financial choices by examining the brain, and he’s successfully answered the second question that he shared with me over dinner. During one of his experiments, twenty-six people had their brains scanned while making shopping decisions. First, they were presented products on a screen. Next, the price was displayed. Last, there was an option to buy. When the product was displayed, the nucleus accumbens fired, excited by the potential reward. When the price was presented, part of the prefrontal cortex activated, indicating that the information was being processed by the reason center of the brain. But when the price was too excessive, the activity in the prefrontal cortex lessened and increased in the insula; there was sticker shock or disgust at the requested amount. The researchers found that neural activity in each of these regions accurately predicted the eventual consumer choice: “These findings suggest that the activation of distinct brain regions related to anticipation of gain and loss precedes and can be used to predict purchasing decisions.”79

  Neural activity predicts investment decisions, too. Knutson and his neuroeconomist colleague Camelia Kuhnen realized what Alan Greenspan came to learn, that “investors systematically deviate from rationality when making financial decisions.”80 But they wanted to know what neurological mechanisms accounted for this behavior. In a study, they asked participants to make an investment decision, choosing among two stocks and a bond. The participants were informed that they would receive gains or losses (subtracted from their volunteer fee) commensurate with their decisions. The brain scans show that the nucleus accumbens was activated before participants made riskier decisions, such as choosing a stock with a poor historical performance. The researchers conjecture that as casinos surround their customers with rewards like free drinks, it may generate activity in the nucleus accumbens and lead to riskier behavior. In the study, the insula activated before low-risk decisions like choosing the more conservative bond. The activity in the nucleus accumbens and insula accurately predicted the choices of participants. The researchers square their findings with prevailing economic models that assume rationality: “The results therefore indicate that, above and beyond contributing to rational choice, anticipatory neural activation may also promote irrational choice. Thus, financial decision making may require a delicate balance—recruitment of distinct circuits may be necessary for taking or avoiding risks, but excessive activation of one mechanism or the other may lead to mistakes.”81 Their brain scans sho
w how the brain makes irrational decisions, and why it’s wrong to assume that humans act in a completely rational manner.

  Knutson and Kuhnen took their research even further. Joined by neuroscientist Gregory Samanez-Larkin, they discovered that irrational investment decisions may be a function of genetics. The questions guiding their research: “Do genes influence cognitive abilities, do they shape the way people learn in financial markets, or do they determine risk attitudes?”82 They focused on the neurotransmitter serotonin, which is widely believed to play a role in happiness and may be central to understanding financial decisions. One serotonin gene, 5-HTTLPR, comes in two types, long and short. Everyone has two copies of the gene in different combinations, long or short. Researchers collected saliva samples from sixty volunteers and asked them to allocate $10,000 among cash, stocks, and bonds. Those with two short 5-HTTLPR copies parked about 24 percent more money in cash, had fewer credit lines, and maintained higher FICO scores than those with two long copies. Those with short copies were found to experience more negative emotions on a consistent basis than those with two long copies. These negative emotions may have led to their risk aversion. They also demonstrated a greater degree of neuroticism, a personality trait characterized by anxiety and apprehension.83 Yet the researchers trod carefully with their conclusions, saying that genetics isn’t the only factor guiding behavior, since not all participants acted as their genes would have suggested.84 Nevertheless, their research shows that biological factors should be considered when trying to understand how humans make financial decisions.