Arnold Kling  

Emotions and Decisions

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The Wall Street Journal reports on a neuroeconomics experiment that compared emotionally-impaired investors with normal investors.


The 15 brain-damaged participants that were the focus of the study had normal IQs, and the areas of their brains responsible for logic and cognitive reasoning were intact. But they had lesions in the region of the brain that controls emotions, which inhibited their ability to experience basic feelings such as fear or anxiety. The lesions were due to a range of causes, including stroke and disease, but they impaired the participants' emotional functioning in a similar manner.

The study suggests the participants' lack of emotional responsiveness actually gave them an advantage when they played a simple investment game. The emotionally impaired players were more willing to take gambles that had high payoffs because they lacked fear. Players with undamaged brain wiring, however, were more cautious and reactive during the game, and wound up with less money at the end.


I remember in the 1960's best-seller The Money Game, author "Adam Smith" argued that emotion was the enemy of the stock market investor. "If you don't know who you are, this is an expensive place to find out," he wrote.

But do not jump to conclusions based on one small study. A few months ago, Business Week wrote,


Neuroeconomics also challenges the notion that emotions can only corrupt economic decision-making. Indeed, emotions grab people's attention and motivate them to focus their rational brains on the issue at hand, says Antonio R. Damasio, a University of Iowa College of Medicine neurologist who studies brain-damaged patients. In his writings, he says that people who feel no emotions are bad at making decisions.

God, send me a one-handed neuroeconomist.


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COMMENTS (4 to date)
Timothy writes:

Geeze, fine, I'll get write on that medschool and Ph.D. program. Man, aren't you picky.

Bernard Yomtov writes:

I'm not sure what this tells us. The financial world is not a laboratory coin-tossing game, and the seemingly silly risk aversion that shows up here may in fact be a rational response to real-world complexities that we do not fully understand, and where significant information asymmetries may exist.

Damon Runyon said it best:

"One of these days in your travels, a guy is going to come up to you and show you a nice brand-new deck of cards on which the seal is not yet broken, and this guy is going to offer to bet you that he can make the Jack of Spades jump out of the deck and squirt cider in your ear. But, son, do not bet this man, for as sure as you are standing there, you are going to end up with an earful of cider."

Maybe those who were reluctant to bet $1 against $2.50 on a coin toss had this in mind.

Jacqueline writes:

I think many people just don't believe in math.

For example, I have been making good money (for a student) exploiting the hell out of the new player signup bonuses many online casinos offer. With the bonuses, playing low house advantage games like blackjack and video poker has a positive expected value. But even though I explained this to several people and showed them all the math, no one believed me until I made $1600 in a month doing it in my spare time.

Jon writes:

These studies cannot fail to prove their point. If you have a game in which the outcome generates higher return for taking risk, the players who tend to take the risk get a higher return.

The problem is in the game there are multiple outcomes. In life there is only one path!

This reminds me of another misinterpretted study I heard about -- rats that tended to show greater risk aversion live longer implying that risk takers are healthier. The problem being that lab rats that are risk takers are protected from drug abuse and other reckless behavior.

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