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January 15, 2005

Mastering the Limbic System

From the Economist:

Economist.com: David Laibson's own work tries to solve a different riddle: why people seem to apply vastly different discount rates to immediate and short-term rewards compared with rewards occurring well into the future. People tend much to prefer, say, $100 now to $115 next week, but they are indifferent between $100 a year from now and $115 in a year and a week. In one recent experiment, noted in our science section on October 30th, Mr Laibson and others found that the brain's response to short-term riches (in this case, gift certificates of $15 or $20) occurs largely in the limbic system, a region that governs emotion. By contrast, the prospect of rewards farther into the future triggers the prefrontal cortex, which is often associated with reason and calculation. Thus, choosing immediate economic gratification, by spending excessively on credit cards or not saving enough even though you “know better”, could be a sign that the limbic system is in charge. Government policies, such as forced savings or “cooling off” periods for buying property or cars, may be one remedy...

Posted by DeLong at January 15, 2005 03:16 PM

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» neuroeconomics from GrabTheMic

Brad Delong points to this:

Identifying the parts of the brain

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Tracked on January 17, 2005 07:41 AM


Brad, I haven't seen the study (or even the article), but I have two related thoughts. One is that people might judge a year from now as too long to be able to predict with much certainty whether either the $100 or the $115 would actually materialize... $15 or even $115 might be "lost in the noise." If the experiment were about, say $100K a year from now vs $115K in a year and a week, they might care a bit more. I'm thinking, for example, what if the $100/$115 didn't actually show up next year -- would I start to send emails, letters, hire a lawyer etc., in an attempt to collect? Probably not. On the other hand if it were $100K/$115K, you're darn tootin' I would.

Now this might actually be some reasoning you could elicit from people, or it might simply be that the difference is embodied in the brainware distinction discussed in the Economist article. I guess my main point is that either way, it might actually make some sense. If you're not willing to do something about it, that means you don't care -- i.e., you're "indifferent." On a $15 difference a year from now... well, I wouldn't do anything about it.

Finally I wonder whether upping the ante in this way wouldn't change the now vs. a week from now result as well (although again one's assessment of the certainty of collecting would play a part).

Posted by: larry birnbaum at January 15, 2005 04:35 PM

Humans aren't rational, period. Not in economics, not in love, not in politics, not in anything. (Excepting perhaps some hyper-rational games. I can't think of any examples.) Economics is just more aware of it, because rationality was one of the axioms that theoretical edifices were built upon. Because we are creatures of evolution, we approximate rationality reasonably well, but evolution hasn't been able to keep our instincts tuned to the changing societies we live(d) in for the last few thousand years. (I've never said this before, hope it makes sense. :-)

Posted by: Bill Arnold at January 15, 2005 04:56 PM

Constant discounting suggests we should compare ($100 today vs $115 next week) with ($100 next year vs $115 in a year and a week). But people don't think like that - most would assume you should equate ($100 today vs $115 next week) with ($100 next year vs $115 in seven years). This hyperbolic discounting is often observed in behavioural economics studies. You don't need to posit it as an "old brain" function.

I have problems with the way traditional economics thinks about risk, uncertainty and discounting. Life is incredibly uncertain - none of us can count on even being alive tommorow, let alone reaching retirement age. The notions of individual "pure rate of time preference" or "risk adjusted rate of return" seem problematic in such a state of nature. And the assumption that individuals either have, or ought to have, a constant discount rate seems very arbitrary.

Posted by: derrida derider at January 15, 2005 05:09 PM

I will gladly pay you on Tuesday for a hamburger today.

If an economist can't figure out why $100 today is qualitatively different from $115 next week in a way that a promise of either a year from now are not different without referring to the limbic system he really has very little chance of saying anything meaningful about economic behavior. The interesting question here is when are economists gonna start building models in which even the most obvious responses to risk, complexity and asymmetric information aren't "irrational"?

Posted by: economaniac at January 15, 2005 05:42 PM

Its the same phenomenon that produces addiction. The addicting substance (drug, alcohol, adrenalne rush from gambling, etc) goes straight to the pleasure center of the brain, produces a very fast high and then fades away quickly.

The drug then becomes the fastest, most efficient way to feel good, as opposed to long term plans, building good relationships or even cooking a meal.

The problem is that once you have burned that short circuit into the brain, it's hell to close it off and re-route the pleasure mechanism.

We have become an addicted society and economy, addicted to short term gain even if it entails selling off all the family jewels and the rest of the inheritance. Isn't that what we have been doing? Closing plants, whole industries, repudiating pension obligations to generate a quarterly profit and a dividend? Selling off 200 years worth of economic development?

Did I imagine it, or did I read the other day that the United States has become a net importer of FOOD??

What do we think we will use to pay for all this?

How fitting is it that we have elected and re-elected a drunk to lead our country?

Posted by: pragmatic_realist at January 15, 2005 06:31 PM

Here it is: "Overseas sales of American farm products, for years a star performer among American exports, slipped by 1.7% to $4.7 billion with shipments of fruit, soybeans and vegetables all showing declines. The country is on track to record a deficit in farm goods this year as imports are running above exports through November, reflecting a surge in consumer demand for foreign wines, fruits and other foods."
Truth about Trade and Technology: Wider Trade Defecit

Posted by: pragmatic_realist at January 15, 2005 06:49 PM

Sorry about the source of the citation above; "Truth about Trade and Technology" appears to be a nasty site full of agri-business porno, but the article itself is from the WSJ. Its the first thing about the farm product deficit that popped up on google.

Posted by: pragmatic_realist at January 15, 2005 06:55 PM

It seems a bit silly to need a complex science experiment to discover that humans are not rational, like it was some big news. ¿What's new about inmediate facts being perceived and assigned different emotional "weight" than far into the future promises?

Posted by: Carlos at January 15, 2005 07:25 PM

I'd go with economaniac above, although I would put it another way.
Most PEOPLE (going beyond economists here) are attracted to $115 a week from now instead of a year plus a week from now. It is called either inflation or Cost Of Living, and I (I'm reaching here) believe this calculation is almost instinctual by now.

Maybe if the survey compared $115 a week from now to $6 210 (15% compounded weekly for 54 weeks) a year and a week from now, then I could see a more significant result.

Posted by: linnen at January 15, 2005 07:53 PM

And as Bimbaum commented, adding a few zeros to the amounts should make things a bit interesting.
I would instead suggest finding out what amount paid out a year and a week from now would be considered equivalent to $115 a week from now.

Posted by: linnen at January 15, 2005 08:00 PM

this is more of that neuroeconomics that is floating around isn't it,

then the reptile remnants are to blame for my debt? that is actually very intersting.

on a side note, I have to thank Carl Sagan for understanding the limbic system ( even wrote a song about it) and blogs for introducing me to this neuroeconomics.

You have given me much to ponder on DeLong

Posted by: Zed at January 15, 2005 08:04 PM

Well, fifteen dollars won't make dinner and a movie. Heck you could be dead next week. Never mind in a year and a week.

There are at least three things going on: (1) a distinction between common vs. special events in life, --or between a little and a lot of money; (2) the widening tree of branching decisions that is possible from the present moment in time; and (3) the great difference in the speeds of emotional and intellectual decisions.

Perhaps frontal-and-limbic BOTH think-and-feel that our control over events recedes fractally. And not only in space but in time. So for common things, a choice between two close-together things that are NEAR to us, interests us much more than a choice between two close-together things that are FAR from us. Indeed, perhaps our closer choice might sweep us on a vector past that far one, and so really pay off! (If we are lucky enough to make it that far!)

Gregory Bateson noted that both organisms and organizations have an "economics of flexibility" that involves habit formation, as follows: Ideas and decisions which survive repeated use, are sorted-out and relegated to a different, more central, more inner category, for use without further inspection. Thus, these ideas become our less-flexible, more hard-wired premises.

It turns out that this process is absolutely necessary so that flexibility may be conserved to risk the trying out of new ideas at the more-expendable periphery. The organ/organism/organization has a flexibility budget, as it were.

(This is pretty much an alternative definition of a Coasian institution.)

Bateson discussed this pattern SPATIALLY, not only in terms of anthropology, where the tribal chieftain's hut is built near the protected core of the village settlement, but also in terms of embryology and morphology, where the most valuable organs (heart, lungs, stomach) are placed near the central planes of the body, while the most distant parts (fingers, toes, skin) are also the most expendable parts.

BUT WHAT IF this process makes its pattern in TIME, too? (Think of it applied as a sort of Kantian category, that is, endemic to the structure of our perception.) THEN decisions about common events in the PRESENT moment will always be preferred when they are more hard-wired and less-deliberated (the exception would be in certain pathologies).

And if that is the case, emotion will always be preferred for these closer-to-now, repeated decisions: BECAUSE EMOTION MAKES QUICKER DECISIONS THAN INTELLECT. (Some of them are better decisions, and some of them are worse. We're not arguing. They are speedier, that is all.) The difference in time-spans taken-up by emotional and intellectual decisions can be vast: indeed, emotions seem almost instantaneous.

This causation would account for the increasing predominance of emotional decisions closer to the present. The organism finds it more efficient.

And decisions about common events in the future will seem progressively more expendable, the further away they are in time. Because with each new decision-step into the future, you increase by a fractal magnitude the number of possible branches. So each separate branch is less and less probable, because your path is more likely to be on another route.

Emotion is less and less applicable in that circumstance (again, except for certain pathologies): instead, you will either apply an "attitude," which is an intellectual habit from an previous emotional experience (and it may engender a "mood"), or you will try rational thought.

But you regard your intellectual decisions with increasing indifference as you look out further-and-further into the future, at least as applied to the common choices. Because it's only one of millions of tiny possible branches by then, which MAY NOT BE on your actual line out through the huge decision-tree. From here right now, the branches are so fine, it's just a muddy blur. So I will take the hundred bucks now, please.

Posted by: Lee A. Arnold at January 15, 2005 08:46 PM

If someone offered me a choice between $100 now and $115 in a weeks time, I'd take the $100 now on the bais that they'll probably have sobered up in a weeks time and realized that they have better things to do with their money than hand it over to me.

Posted by: Ronald Brakels at January 15, 2005 09:05 PM

I'd agree with what some commentators have suggested: that the two questions ((1) 100 Usd today vs 115 Usd 1 week from today; and (2) 100 Usd 1 year vs 115 Usd 1 year + 1 week from today) are not equivalent. In (1) the individual could simply be pricing counterparty risk - the promise of money in the future is not a guarantee that one will get it. What would happen if one replaced (1) by (1') 100 Usd 1 week from now vs. 115 Usd 2 weeks from now?

Also, of course, a person who has no money and who has only access to a loan shark, it would be perfectly rational to choose 100 dollars now, since that 115 in the future would be discounted to less.

Posted by: Andrew Boucher at January 16, 2005 12:05 AM

The part I find questionable is the suggestion of a "cooling off" period before major purchases. Most people aren't charging cars and real estate to their credit cards, and those aren't normally impulse purchases. It is silk blouses, dinners out, hockey tickets and power tools--those purchases that credit cards make easy, which provide a instant rush of consumer satisfaction, and which can rapidly undermine the ability to save, that are a problem.

Posted by: quartz at January 16, 2005 03:46 AM

Studies like this are often called "Emotional Intelligence" or EQ. Supposedly EQ helps determine your success in life. The classic test is a test for children called the "marshmellow test." You leave a marshmellow with a child and tell her if she doesn't eat the marshmellow in the 5 min. you're away, she can have two marshmellows when you get back. High EQ can put off the reward for the greater reward, while lower EQ can not resist tempatation.

Now that we think it's the limbic system, does this mean we'll invent a pill to cure chronic bankruptcy?

Posted by: Unstable Isotope at January 16, 2005 06:16 AM

Given the choice between one transaction you can settle now, versus two transactions a week apart where something might go wrong with either of them, how much would you pay to get it over with?

I've sometimes been willing to pay a dollar extra to pay my utility bill over the phone instead of paying for a stamp and taking a trip to the mailbox. In a really good month with low rates that might amount to 5% instead of 15%, but I haven't established what the most I'd pay is, only that I was willing to pay that much.

Posted by: J Thomas at January 16, 2005 08:07 PM

Kind of means goodbye to time separable discounted utility and recursive form, isn't it?

Posted by: weco at January 17, 2005 12:36 AM

"Government policies, such as forced savings or “cooling off” periods for buying property or cars, may be one remedy..."

Is this a joke? God forbid people be allowed to make rash purchases. Yeah, we should pass a law to stop them from spending their own money frivolously. Gimme a break.

Economists should stick to numbers and leave social policy implications to others.


Posted by: joeblow at January 18, 2005 02:32 PM

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