The Heady Conversation

After the lunch at the Debt conference on Friday, Professor Brian Knutson, a professor of Psychology & Neuroscience at Stanford, presented a paper on Brain, Decision, and Debt. The field of neuroeconomics (which has been around for about a decade) examines how the brain reacts when a person makes a decision, and how the brain causes individuals to make decisions. His research attempts to link the brain to debt – which he characterizes as a risk problem – and to show how people get into debt.

Professor Knutson observed that the costs/benefits of debt evoke certain emotional responses. That is, when people consider the costs associated with financial decisions, they feel bad (and you can see that reaction on a CAT scan). In contrast, people feel good (and their brains show it) when they consider the benefits of making certain financial decisions. Using power point slides that confounded most of the lawyers in the room (including me), he explained how it is possible to examine the brain (and, which part to examine) to see how it reacts when people anticipate making, or losing, money (i.e., before they take a financial risk).

His talk was quite different from the rest of the ones we heard during the first day of the conference, largely because his research examined what the brain was physically doing when people respond to certain good and bad financial cues in a laboratory setting. To determine how the brain reacts when people make certain decisions about debt, Professor Knutson and his co-authors tested a large group of participants (aged 20-80, from a broad demographic group – not just college students!). The test asked a series of questions designed to teach the participants how to make good financial decisions. The participants also had been asked to self-report their debt levels.

The preliminary data indicate that people who are bad at learning to avoid the "bad" financial cue are also likely to have higher (self-reported) debt. Thus, loss avoidance (the ability to be good at avoiding bad financial cues) appears to correlate with reduced debt susceptibility. This is not a terribly surprising conclusion, but I suspect few of us would have guessed that you can look at the brain and determine something like this.

Professor Ming Hsu, a economist at the University of Illinois, responded to the research by noting the problems generally involved with behavioral research based on laboratory experiments. For example, he noted the difficulty of doing this type of research effectively because of the ethical challenges posed when researchers attempt to make the participants in the experiment truly experience a financial loss. That is, participants could understand and truly feel a financial loss (and change their behavior in response to it) only if you actually make them lose money. This poses a whole range of ethical problems that researchers obviously would want to avoid.

Professor Hsu also questioned the applicability of this type of research to consumer spending decisions because most neuroeconomic experiments involving risk avoidance have concerned investment or other business debts.  He argued that consumers may behave differently in a test that involves debts they have (or will) incur in order to purchase basic items like food, rent, or children’s clothing.