Social Neuroeconomics – Over bidding

Social Neuroeconomics – Over bidding         

Raphael Spiro QC 12 and Jim Stellar

Raph has been reading a bit of the literature on neuroecomomics, something we have written about before in this blog.  We’d like to propose that the same brain areas that are involved in making decisions about purchases made with money are also be involved in “purchasing” with time and effort one’s major or field of study in College.  In particular, we wondered about the influence of others on these major-choice decisions.  Raph came across a series of studies that deal with the influence of others on decisions such as an auction where one is bidding against competitors.  Let’s begin by asking Raph to tell us about one of those studies.

Most people put a lot of thought into their economic decisions, and while we’d all like to think we’re above the influences of peer pressure and social competitiveness, it would seem that no amount of planning or intelligence can fight our natural inclinations.  In a 2008 study by Delgado et. al, brain imaging technology shed some light on the way in which the people around us affect our money management plans.  Participants in this study took part in two potential money-making tasks.  In both tasks, participants were asked to place a bid for the round.  If their bid was closer to the target value for the round than the competitor’s bid, they won the round and kept the difference between their bid and the value.  If they overbid, they did not win anything, nor did they lose anything.  The first task was an auction in which participants were pitted against a human competitor.  Before the auction, the participants met their counterparts.  In the second task, participants played a lottery, where the outcome was determined by a computer.  Unbeknownst to the participants, the computer and the human competitors used the same strategy when betting, based on a Nash Equilibrium.

The study found that when participants lost against their human competition in the auction game, they experienced a decrease in activity from baseline in their right ventral striatum (or what we also call the nucleus accumbens, a brain reward area).  This activation pattern is commonly seen in situations when money is lost.  Additionally, participants who experienced greater decreases in activity in their right accumbens after a loss were more likely to overbid.  That is to say, the participants who felt the effects of losing in front of a peer more were more likely to overbid.

Fascinating that the effects of losing in front of a peer was related so strongly related to overbidding, especially since we know from the work of Brian Knudson at Stanford  (and others) that believing one is going to make money activates the accumbens. 

One explanation for the results stems from the possibility that the participants in the study were not responding to a loss of money or points.  The loss of an auction carried no penalty.  Generally, a situation such as this would not be expected to produce decreased activation in the right accumbens.  The researchers suggested that the activation pattern produced was a result of the perceived loss in front of a peer.  This “loss reaction” and the overbidding it produces can be related to learning in and out of the classroom.  Both school and work place are rife with social competition and possibly analogous situations to the one examined in the Delgado et al. study.  In school, receiving marks on a test that are lower than the class average or than a specific classmate’s remarks might elicit a similar “loss reaction.”  In the workplace, receiving a bad review or being passed over for a project opportunity could produce similar effects as well.  While overbidding may be slightly maladaptive in the case of a monetary auction, in a work or school setting it seems like a positive reaction.

Overbidding in these settings would ensure a more successful outcome in all endeavors.  “Overbidding” on a test translates to over-studying.  A student who feels a very strong effect of losing will be likely to overinvest their resources (in this case time and effort) to ensure that they succeed on their tests.  Similarly, an employee or intern will work hard to ensure that they are the best candidate for a promotion or special project.

Social cues may can influence these decisions and lead to herd type behavior where one commits too much to an object (or a major?) on the advice and behavior of others.  This was shown in another fMRI accumbens study by Burke et al. 2010, where subjects were given the chance to buy stocks after observing the buying decisions of others (a group of 4 faces marked with a check for having bought the stock).  If all 4 faces were marked as having bought the stock, or did not buy the stock, the % buying by the subjects swung from 80% to 20% – the herd effect. The researchers found the subjects were also influenced by the pictures of chimpanzee faces and by data on the stocks themselves, but not as much as the herd.  The accumbens reacted to the herd effect and the authors argued that it did so independently of, and perhaps driving, the buy decisions.  Other brain areas (amygdala, anterior cingulate cortex) were involved, particularly when the buyers went against the herd, but that is another topic.

What does all this mean for experiential education?  For us it gives new level of power and weight to one’s reflections on the gut decisions in deciding if that experience is right for us.  For example, in a prior job, one of us (JS) saw that students studied abroad independently engaged in much less reflection than students who went as a group led by a faculty member.  We thought these students, participating in a program in Cairo, were sitting in their rooms at night talking over the day’s events and reflecting on lessons they had learned as they adapted to a culture and perspective that differed from what they had experience in America.  In that environment, some might have decided to become international human rights lawyers/workers.  If others in the group were also making such decisions, it is not hard to see how one could be sucked in.  In addition, this group decision could have been perceived similarly to bidding (if it took on a competitive air), leading to an occurrence of the over-bidding phenomenon, as one did not want to be perceived as making the wrong decision.  This is a common group effect that we have seen many times in social psychology and in the general course of human affairs.  But to us, it takes on a certain power and precision being linked to brain areas and quantitative economic studies.  The question is how do we in higher education leverage these phenomenon to produce better engagement and learning by our students in and out of the classroom?