Receive regular updates via email

The neurophysiology of gambling

If you read my previous post on the neurobiology of risk, you may recall that the ventral striatum regulates risk and rewards. In most people, thinking about winning money increases dopamine in the ventral striatum, and thinking about losing money decreases it. This is where gambling comes in.

This excellent post on the neuroscience of gambling describes a series of experiments done on monkeys that show that dopamine neurons learn when to expect rewards. Dopamine increases when the reward comes, decreases when it’s supposed to come but doesn’t, and wildly increases with unexpected rewards. And unexpected rewards are the principal attraction of gambling.

Instead of getting bored by the haphazard payouts, our dopamine neurons become obsessed. When we pull the lever and get a reward, we experience a rush of pleasurable dopamine precisely because the reward was so unexpected. (The clanging coins are like a surprising squirt of juice [for a monkey trained to expect juice as a reward]. It’s operant conditioning gone berserk.) Because our dopamine neurons can’t figure out the pattern, they can’t adapt to the pattern. The end result is that we are transfixed by the slot machine, riveted by the fickle nature of its payouts.

Thus, the unexpected reward essentially makes the ventral striatum very happy, and it can’t figure out how to become very happy again except by continuing the same behavior that led to it before. And there you are, two hours later, out of money at the blackjack table because you were waiting for that rush.

However, most of us have self-regulating systems in the brain that will eventually tell us that logically, we can’t spend all our money chasing the hope of an unexpected reward, that this isn’t enough of a reward overall, and we get into our cars or onto our flights from Vegas and leave the gambling table and its ventral-striatum-enticing allure behind.

But in pathological gamblers, the ventral striatum doesn’t react the way it’s supposed to (perhaps because the unexpected reward becomes expected?). Riba, Kramer, Heldmann, Richter, and Munte (2008, PLoS ONE) gave volunteers dopamine-increasing drugs and found that not only did the subjects make riskier choices, but parts of the basal ganglia and midbrain, which are important parts of the reward system in the brain, showed decreased activity after unexpected rewards.

As it happens, the dopamine-increasing drugs Riba et al. used were intended to treat Parkinson’s disease. It’s known that such dopamine agonists, as they’re called, can trigger pathological gambling behavior. Riba et al. suggest that pathological gambling–at least in Parkinson’s patients–comes from a need to overcome a dulled response in the reward systems of the brain.

This is similar to the concept of drug tolerance, where regular drug users must use more drug than they previously did in order to get the same effect because their system has become less sensitive to the drug. Essentially, gambling addicts are like any other addict: they don’t get the normal feelings that non-addicts do when pursuing their behavior of choice, so they do it longer, harder, and more in order to achieve the reward they crave.

Negotiating and Culture

Firstly, my thanks to Million Dollar Journey and their entry Confessions of a Car Salesman which discusses negotiating techniques used by used car salesman. Reading that blog got me thinking on the topic of negotiation.

Through my travels, I have often been fascinated by cultural attitudes towards negotiation.

In a number of places in the world, prices are flexible. They can be negotiated, bartered or otherwise influenced. Some individuals are raised in a culture of negotiation. They always try to talk their way to a different price.

Many of us in North America have been raised in a culture of price tags. What we see is what it costs. We look for sales and can try to maximize our value through those, but ultimately, we pay the listed price. Now, is this bad? Not necessarily. It means that in day-to-day life, you don’t have to worry about negotiating. However, in a few remaining areas of North American life, negotiating is common and almost required. These areas include buying cars, arranging salaries and asking for raises, and buying houses. Also, in a not so coincidental way, areas such as these are ones in which many of us feel uncomfortable.

Why do we have issues with negotiating? There are a multitude of reasons. First and foremost, for many of us it comes down to issues of appearances. If we negotiate, we can feel poor or vulnerable. I have had the privilege of witnessing master negotiators at work, and they let no sense of shame interfere in their bargaining process. They will claim poverty, starvation, the need to support a family and many other items as they push the price in the direction they want. Frankly, a good negotiation between two skilled parties is a fascinating spectacle. Not all negotiations are showy and loud though, everyone has a different style of negotiating that can work for them.

We need to look past the “price tag culture” in which many of us have been raised in order to see the benefits that lie in negotiating. A fraction of a percentage point lower interest rates for a mortgage can lead to savings of thousands of dollars over time. A few well placed words can cut hundreds or even thousands of dollars off of a car. Price tags make simple things like shopping trips to the grocery store faster and more convenient. However, by accepting prices on the larger ticket items, we often might be throwing our hard-earned money away.

So, look past any insecurities you might have on the topic, and examine the benefits you might receive from negotiating. Rather than sacrificing any self-esteem, you might end up thousands of dollars ahead for putting in a little time. As a good starting point, take a look at the entry on Million Dollar Journey, it can help you see just how easily we get sold up on prices, and how we can turn those tricks to our own use. Remember, sometimes you CAN look beyond the price tag.

Addictions – Retail Therapy

We’ve discussed the ventral striatum in this blog before. It’s a component of the brain involved in processing rewards in the brain. When you do something that makes you feel good, it helps to release a positive neurotransmitter such as dopamine.

Scientists believe that this rewards mechanism served an evolutionary purpose in that it helped reward people for trying and exploring the unknown. When the world was full of obvious harm, such a feature was dangerous, but it also helped to develop the drive to explore that helps to define humanity. However, in a modern world, where the wildest place many of us explore is the local mall, such instincts cause problems for us.

Marketing and sales build up products so they take on grand proportions. New and novel, these products play on that ancient brain response, triggering a positive sensation. Some indications link this response to stress relief, which can be addicting in itself depending on your personality type.

Our defense against this is the conscious brain. If something makes you feel good, ask why? Are you buying because of novelty? The tragic part of novelty is that it does resemble drugs. Eventually you build up a resistance, and you require more and different types to break through that resistance. That new novelty often costs more and more to achieve.

Don’t buy for novelty, buy for value and true pleasure, the results last much longer.

A Rose by Any Other Name

Part of the art of marketing is in repackaging goods and reselling them in hundreds of different configurations. We pay more and more for things we could get cheaper in other forms.

Through advertising, marketing and product placement, retailers and companies play an elaborate game of smoke and mirrors in order to convince us to buy product variations. One fantastic example of this is the new trend towards 100 calories (or that range) candy bar variations.

On a recent shopping trip, I purchased a regular Coffee Crisp and a 100 calorie Coffee Crisp Single. I LOVE Coffee Crisp Bars. The singles were placed in an arrangement close to eye level, with all 100 calorie variations clustered together. The larger, obviously less favored bars were positioned lower and away from their lighter and “healthier” cousins.

The 100 calorie single weighs 19 grams and cost 89 cents where I purchased it. The standard Coffee Crisp weighs 50 grams and cost 99 cents. The standard Coffee Crisp is 260 calories. Now, let me show you a neat trick:

50 grams divided by 19 grams = 2.63

260 calories divided by 1000 calories = 2.60

The proportions are the same. We are paying about two and a half times as much money, for two and a half times LESS chocolate. Is there a reason why we can’t just divide the larger bar into smaller sections? No.

Truth be told, there are people who will eat an entire chocolate bar if they open it. For them, these smaller pieces can be a good compromise. However, if you can manage the willpower and want your chocolate fix, buy the larger one and divide it up. You get just as much satisfaction and all you lose is the packaging.

Flattery Will Get You Everywhere

One of the most interesting facts about how products are sold, is that the products which can do you the most harm are often the most flattering to you in their ads.


Flattery used to belong to the domain of interpersonal relations. You “buttered someone up” if you wanted something from them. You flattered someone to influence a result in a positive direction. Sadly, this tool has been adopted by the marketing industry.


We like being flattered. Plain and simple, there’s no one who doesn’t like it, though they may be shy about receiving such flattery in public. There’s a rush of recognition and pride in knowing that others share a good opinion of you. How does this translate to marketing?

Alcohol companies talk about exciting lifestyles, smoking was always for the adventurous and stylish, and our cars tragically live more exciting lives than we often do. Credit card companies are the most entertaining with how they offer you a veritable Olympics of card recognition. First gold cards, now platinum, then platinum plus. You are given more and more recognition as they flatter you. Pre-approved applications come with directions indicating that they will be handled with “special care” as the company is honored to offer you your due.

Attending bars and drinking alcohol are marketed as part of adulthood, which makes them all the more attractive as soon as youth turn of legal age. Credit cards, also viewed as a staple of adulthood, are offered in universities to youth eagerly trying to establish their adult identities.


Just as with flattering individuals, we need to look through at the motivations behind the flattery. In the end, we truly are doing a favor to a company when we buy or use its product, but we do owe it to ourselves to make sure we receive the maximum benefit for the money we spend. So look beyond the flattery, and see what the flattery is trying to hide.

Yoga for Financial Peace

Have trouble with controlling your shopping impulses?

As bizarre as it may sound, it just might be crazy enough to work. If we want to look at the background on it, we can compare financial health to physical health. Yoga has been cited as a beneficial action for weight loss and health maintenance. Not only does it help as an exercise, but through the movements of yoga you help to calm and focus your mind, promote inner contentment, reduce stress and anxiety, and promote a greater awareness.

Yoga is already being used as a contributing treatment for depression and anxiety (click here to be taken to an article from Psychology Today on the topic). As the very nature of this site suggests, how we handle our money is very much related to our state of mind. We can use shopping as a tool to feel better (such as retail therapy), we can avoid dealing with our financial situation (a cause of stress and anxiety for most people) which then compounds the situation further, or we can just not be aware of how the way we think can influence the way we spend money.

We are encouraged by the media to find the solution to our problems through “stuff”. However, if you can find that peace and satisfaction that we all crave WITHOUT spending your money, isn’t that a stronger position to be in?

Brent Kessel wrote an excellent article on this topic called “Can Yoga Make You Rich?” that was published on MSN Money (click here to be taken to the article). In it, he discusses how yoga can help you understand how you think, which is usually the first and most important step to regaining control of your finances. I highly recommend reading the article.

Obama, money, and the recency effect

Obama’s tactics this campaign season have mostly involved not addressing the rumors circulating the Internet and the country about his beliefs and background. But that’s changing (he recently put up a website to address them), and it’s a good move to increase his chances of winning the presidential race. This article discusses how it’s important for Obama to respond to smear tactics in the current presidential campaign because if he doesn’t, voters hear only the accusations, and will tend to give credence to them.

Why? Because people really do believe what they hear, especially if they’re predisposed toward it (such as the many people who don’t want Obama to be the next president). Almost everyone–mentally disturbed people are the biggest exception–assumes that what other people say is the truth. This is why it was so easy to alarm your mother by telling her you’d lost your brother on the way home from school, or get your friend to believe that you were only taking her to a friend’s house to pick something up, not to bring her to her surprise party.

Aside from people’s tendency to be credulous, the recency effect is also in play. The recency effect is the phenomenon that people tend to remember the last few items of a long list best. Its corollary, the primacy effect, states that people tend to remember the first few items best, and which one predominates depends on the situation. Sometimes it’ll be both. But when it comes to persuasive arguments, one or the other generally wins, and the recency effect comes out on top when there’s an appreciable delay between the first message and the second–such as when campaign ad #1 runs on Thursday, discussing a candidate’s platform, and campaign ad #2 runs the next Tuesday, smearing that candidate and calling his or her platform a lie.

How does this apply to personal finance? Don’t let yourself be swayed by whatever you hear, especially whatever you hear last–especially when it’s from a salesperson or someone else who stands to gain by your decision. There are many places this can happen, and many topics. It’s best to invest in foreign markets; it’s best to invest in domestic markets. You need to keep six months’ salary in your emergency fund; you only need three months. It doesn’t make sense to make high-interest payments on a big-screen TV; but the payments are only $80 a month.

How and when you receive persuasive messages will affect how much they affect you. Pay attention to how information changes your opinions. If you find yourself being swayed too much, try reviewing what you know of each of your issue’s positions in the same interval, then decide what you think is fact and what is only opinion, salesmanship, or fear-mongering.

The neurobiology of risk: the posterior cingulate cortex

The cingulate cortex sits on top of the corpus callosum, the thick cable that connects the two halves of the brain. It’s connected with the amygdala, which coordinates perceptions of feeling and emotion, and divided into the anterior and posterior parts. The anterior cingulate cortex has been implicated in effortful decision-making (Mulert et al., 2008, Neuroimage), and the posterior cingulate cortex (PCC), relatedly, in decision-making and risk.

Decision-making and risk are important parts of the animal world; any organism needs to know whether a particular activity is going to get it killed, and decide whether that activity is worth it. Watson (2008, Annals of the New York Academy of Sciences) suggests that sensitivity to risk helps animals survive. The PCC hasn’t been studied much until recently, but it’s possible that it’s the center for risk-related brain activity.

Watson found that the PCC in monkeys showed sensitivity to risk, and its strength, in decision-making tasks. McCoy and Platt (2005, Nature Neuroscience) found that PCC in monkeys activated when monkeys made risky choices, and became more active with more perceived risk.

This article describes how the PCC judges value of rewards as circumstances change. Researchers (Platt et al., 2003) trained monkeys to do a task and rewarded it with juice, so that the monkey learned to expect the juice when it delivered. When the monkey performed the task but got no juice, the PCC fired very strongly, giving what the researchers described as a large “reward-prediction error,” a comparison of a predicted reward with the actual result. This isn’t specifically risk-related, but it does demonstrate that awareness of rewards and their absence is important–otherwise there wouldn’t be a segment of the brain devoted to it. And risk is all about evaluating reward.

Perhaps the main thing to take away from the neurobiology of risk is that it’s inextricably tied into emotion. The PCC, like the ventral striatum, contains dopamine-releasing neurons, and it’s also part of the limbic system, which regulates emotion and motivation. And fear, which may be particularly important in the PCC–learned fear may be stored there–regulates risk-taking behavior and perceptions of risk in general. This, too, makes sense; it doesn’t really matter what the objective risk of a given activity–darting into the open to get that delicious plant, say, or using $100 to buy stock in Google rather than putting it in the bank–actually is if you don’t have some emotional investment in the outcomes.

Investing: Can you take the pain?

On a day at the stock market like today we almost all feel the pain. As I write this the Dow Jones Industrial Average (the Dow) is down 130 points for the day and off 450 points in the last 4 trading days. So when the value of your mutual fund or stocks are moving strongly to the down side what are you tempted to do? Sell to stop the hemorraging or buy more because of the value. Some psychological studies can tell us which way we probably lean.

Studies done in the 1970’s have shown we feel twice pain or distress for the financial loss than we feel happiness for a gain. Let us see if I can engender some pain and gain in you. Imagine you have a mutual fund account with a value of $100,000. You get your quarterly statement and the account value has fallen to $90,000, how do you feel? A little (maybe more than a little) pain there, heh? Now you open the statement and see a $10,000 gain to $110,000. Feels pretty good, but definitely not a strong as losing that $10 grand! Leave it to psychologists to figure a way to measure phychological pain and pleasure, but the double the pain makes sense to me.

So how does this affect us as investors? From the question in the first paragraph, I think when our investments start falling in value, we are strongly tempted to sell to just stop the pain. It gives us a good idea why so many investors are so good at buying high and selling low. I know personally when a stock I have invested in goes down I start to mistrust my judgement and search the news for clues I might have missed that this was a bad investment. Doing this research will, hopefully, help me hang on to good investments when the overall market does not think much of them.

One last point we need to remember so we do not let the pain of less lead us to the poor house. A recent article submitted to Seeking Alpha did a pain vs. gain calculation. First, the average return of small cap stocks over the last 60 years is 16.3% per year and the average return for large cap stocks is 12.76%. The author used monthly returns to record a positive point for each percentage of positive months and 2 negative points for each percent negative return in negative months. The more volatile small cap stocks racked up a score of minus 788 (-788) points even as an investment would have grown to 13 times the original investment (using rule of 72). The steader large cap still gave us minus 482 (-482) pain points in spite of a 10 fold gain.

Bottom line: If you want to be a stock market investor, you must figure out a way to handle the negative emotions of negative returns. Markets go up and down, but the research shows it is much harder for us to live with the down part.

The psychology of gambling

Gambling is a bad financial decision. Most of us know that it’s a game that–at least in regulated places such as casinos–you can only win if you happen to be lucky. The odds are always against you. So why do people love it? In essence, because our brains are programmed to.

Psychology has examined how gambling, and the pursuit of rewarding activities in general, works. Just as there are different types of reward (and punishment), there are different schedules for doling it out: fixed interval, fixed ratio, variable interval, and variable ratio. Consider a rat that gets a food pellet sometimes when it presses a lever. In fixed interval, its gets a pellet every half-hour, say, no matter how many times it’s pressed the lever. In fixed ratio, it gets the pellet every ten lever presses. In variable interval, it gets the pellet after a random amount of time has passed, and in variable ratio, it gets the pellet after a random number of lever presses.

Researchers have used just this sort of setup to find out which type of schedule creates the most addictive behavior. They delivered the reward according to whatever schedule that rat was assigned to. Then, when the rat understood the setup, they stopped delivering the reward.

Rats in the variable ratio schedule pressed their levers the longest after the rewards stopped coming. If you think about it, it makes sense. If you know you’re supposed to get a reward after thirty minutes, or after thirty lever presses, you’ll stop. But if you think that just one more lever press might do it, you hang on longer.

This is exactly why gambling is so peculiarly addictive. It’s not like, say, constructing model airplanes, where if you know if you put in the time you’re sure to be rewarded, or like unpaid overtime at work when you know you won’t. The sweetness of gambling is the unexpected payoff. If you stop, you’ll never know if the next lever press, or hand of cards, would have rewarded you.

There’s a physiological reason that that unexpected reward is so appealing, and why we’re willing to give up time and effort and money for the chance of getting it. I’ll write about that. Sometime in the next few posts.

On looking poor

Smart Spending recently discussed a Saving Advice post on how looking poor can benefit you. The comments are great reading; a lot of the readers have anecdotes on how some snobby salesperson missed out on a great commission by passing over a person who didn’t look like he had much money to spend. There are definitely advantages to looking poor–or at least not looking rich. The original poster, Shannon Christman, lists some: it can help you negotiate, it can net you freebies and like-minded acquaintances, it can make you feel good to laugh up your sleeve at an unsuspecting salesperson.

So why don’t more people do it? Because we don’t; we go to the bar with friends when we really can’t afford it, we buy a new dress for our friends’ weddings because people we know will be there, we send our kids to school with lunch money when we should be getting financial aid.

Generally speaking, people don’t like to look poor. We like to keep up with the Jones, to look like we’re winning at life–to socially conform. “Normative influence” is the pressure we feel to be like others so that we’ll be accepted. If we look poor, we won’t look like everyone else, and then they might not accept us.

Blunt Money posted on this a while ago, saying, “For me, it’s easier to do what I really want to do when I have the money to do otherwise. I’m less concerned about what others think…But when I really had very little money coming in (there were a few years not that long ago when I made $4,000 or less per year) I was more concerned about what people thought.”

Similarly, a recent post on FAIL blog: (via Get Rich Slowly) is about someone who’s looking for a new service: “video rental store but for books.” This would be a great idea, maybe even something for a young entrepreneur to jump on…if not for the fact that we already have something called a library. (Or a used bookstore, perhaps.)

But look past the apparent tragic unawareness on the poster’s part of public services. Why, in fact, do people use Netflix instead of the library? Would people actually use a book-Netflix? I suspect they would, even if they were getting the same service for a little money rather than for free, because “only poor people can’t afford to pay for books.”

How much does your fear of looking poor influence what you do? Do you truly want that new car or shiny watch, or do you just want to look like a well-to-do member of society? If you didn’t care what other people thought, would your spending habits change?

« Previous Entries