Receive regular updates via email

Good news never lasts

A recent WiseBread post discusses how people’s standards of living tended to rise linearly before the advent of credit cards, and how they don’t necessarily now because credit-card holders can borrow money against their future to raise their standards of living in the present. The author, Philip Brewer, discusses being deliberate about raising one’s standard of living and raises some good points on when to buy things to make you happier and when to say “I have enough.”

He mentions that it’s important to be happy with a stable standard of living, because “we know that people are made temporarily happier by increases in their standard of living,” but that those increase don’t happen often enough to rely on. He’s right; it’s a well-known phenomenon that people adjust to new situations remarkably quickly–and it’s easier to adjust to good news than bad.

Why is this? Basically, it’s because it’s important for us–for any organism, really–to be able to understand our world. That means that it has to be familiar; novelty by definition is strange, and strangeness is something the brain doesn’t like. So it analyzes the situation, accepts it, encodes it as the new normal, and gets on with its other tasks. There are neurons in the brain that respond specifically to novelty. There’s also a big section of the brain, the prefrontal cortex, that carries out what are called executive functions: synthesizing, organizing, understanding.

So it’s a physiological fact of life that sudden good news isn’t always going to be as thrilling as it is the day you get it; that feeling may last a day or even a few, but eventually your brain will incorporate the news into its idea of how the world should be, ought to be, and will settle down. Philip’s advice on considering ways to increase standard of living long-term, not just temporarily, is good to follow, because those temporary increases will inevitably go away.

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.

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.

The neurobiology of risk: the ventral striatum

The ventral striatum is a relatively small area tucked deep inside the brain near the basal ganglia. Until recently, not much was known about it. But it’s recently been linked to reward, decisions, and risk, and as a result is getting much more press than it used to. It’s important in what we perceive as rewarding (such as status and keeping up with the Joneses) and how rewarding it is. It’s been linked to pathological gambling, and it matters when you’re thinking about what to do next with your portfolio.

The ventral striatum consists of two portions, the nucleus accumbens and the olfactory tubercle. Its most important neurotransmitter–to our current knowledge–is dopamine. Dopamine is associated with pleasure and with motor functions. (Dopamine-increasing drugs are used to treat Parkinson’s disease.) The ventral striatum is closely linked with the limbic system, which involves emotion and motivation: it receives input from it and sends output to it, mainly inhibitory. It’s thought that the ventral striatum helps to suppress certain mechanisms in the limbic system, thereby selecting the appropriate ones and silencing others.

When you consider all that, it’s a natural nominee for the reward center of the brain, and that seems to be its function. There have been several studies recently that look at different kinds of reward, and they all light up the ventral striatum. As described in the Society for Neuroscience, anticipating financial gain increases dopamine in the ventral striatum, which increases pleasure. Thinking about loss, on the other hand, decreases dopamine. It turns out that most people are more sensitive to decreases of dopamine than increases, which is where risk aversion comes from. The ventral striatum tells your limbic system that the behavior you’re considering is risky or that the loss you’ve just suffered is a bad thing, and the limbic system tells your conscious mind that it feels bad about what just happened, which affects your decision-making.

The ventral striatum is a tiny structure with big effects on our behavior. Most of decision-making, including financial decision-making, includes processing risk, which includes weighing rewards and losses. The ventral striatum is instrumental in modulating those behaviors and processes.

5 Ways our Brain Works to Wreck our Finances

1. Redefining Needs

Perhaps it’s marketing or perhaps it is our culture, but we’ve gone from wanting certain possessions to NEEDING them. Whether it’s a top model car or a specialty coffee, we confuse the difference between wants and needs. We only really NEED food, shelter, companionship, and a job to pay for the food and shelter. That’s it.

2. Psychological Addictions

Not all addictions are physiological. Some are much more complex. Smoke breaks are both times to smoke and a break. Often it’s the “break” aspect that helps people relax. The same applies with coffee breaks, impulse shopping, or gambling. These things make us feel better in our brain, and as a result, we become addicted to that feeling.

3. Unrealistic Understanding of Risk

Whether it is through denial or simply overconfidence, people often invest money they can’t afford to lose in investments that are at a higher risk Or, we assume because an investment has performed will in the past, it would

4. Procrastination Rationalization

Our brains are often magnificent at rationalizing actions or lack of them. This can keep us from acting at times that would most benefit us. We avoid making changes in the present that can benefit us in the future, and we always have “good” reasons.

5. Inability to Admit Mistakes

Because we often attach our own self worth to the effectiveness of our decisions, mistakes are viewed as diminishments of ourselves. Because of this and many other reasons, we tend to avoid admitting when we’ve made a mistake, which prolongs the time until we work to resolve it.

Change is hard because the brain is hard-wired

Here’s a quick way to improve your health, the planet, and your bank account: become a vegetarian.

Assuming you’re not one already, you hated that idea, didn’t you?

Vegetarianism is arguably more of a hot-button issue than some, but substitute any radical change (try “give up your electricity”) and chances are, you’ll hate it, even if it rationally makes sense.

Generally speaking, people don’t like change, even when they know it’s for the better. A habit takes weeks at the shortest to form or break, and habits are like behavioral rules of thumb, making it easier to live our lives; of course we don’t like it when we’re asked to do something different. Thus, change takes time. But it’s not just psychological barriers that make it hard to change our behavior; it’s also because physical paths for new change must be carved out in our brains.

The brain consists mainly of neurons (brain cells) which “talk” to other neurons using chemical signals called neurotransmitters. The junctions where neurotransmitters live are called synapses. Synapses are critical in brain function; how many there are, where they are, and what neurotransmitters they contain affect memory, learning, emotions, mood, alertness, and more. Memories are commonly thought to be recorded by strengthening or weakening particular synapses and adding extra ones in certain neuronal pathways. So if you’re used to, say, defining a meal as “meat and two sides,” then it’s going to take a while for the neurons to change the right pathways, altering synapses, in order for your brain to be able to define a meal as “grain or vegetable base with protein side” (or what have you).

This doesn’t mean it’s not worth doing, of course. The brain is a marvelously adaptable thing, and the fact that the adaptation takes time because of the physical changes needed doesn’t detract from that. So the next time you try to change your behavior–perhaps by giving up your daily Starbucks or your monthly salon visit, or biking to work instead of driving–and find it difficult, don’t give up. Your brain is in the process of changing its scaffolding for your behavior, and once it’s done, your new behaviors will be hardwired into you, just like the old ones.

The Neurobiology of McMansions

How Our Brain Structures Led to the Housing Crisis


That is the derogatory term that arose the last few years for the large cookie-cutter suburban subdivisions that seem to have sprung up everywhere. You may have driven through these subdivisions and, much like me, wondered where so many people found so much money. I know what I make. I know I’m in the top 5% or so of income earners. So why don’t I have a top 5% McMansion?

In retrospect, it has become obvious that many of these people could not afford what they bought. This leads to the question of why they bought houses that pushed the limits of what they could pay. Blame it on their brains.

It is a sad but true statement about the human race that we don’t care about absolute wealth. We care about relative wealth – how much wealth we have compared to other people. We don’t want a higher standard of living if everyone else has it too. Some books would say it is all a result of an elaborate mating game. Women and men, in an ever more intense race to impress each other, attempt to make it look as though their income and success are much higher than they really are. But it goes deeper than that. The problem with the housing market can be blamed on the ventral striatum.

Last year, the neuroeconomics lab at Bonn released the results of a study or reward that involved scanning the brains of participants. What they found was not just that brains responded well to a reward. They found that brains responded even stronger to a reward that was better than the reward given to others. The experiment involved pairs of male volunteers competing for prizes on the same task. The BBC article about the research explains it well.

Both “players” were asked to estimate the number of dots appearing on a screen. Providing the right answer earned a real financial reward between 30 (£22) and 120 (£86) euros. Each of the participants was told how their partners had performed and how much they were paid. Using magnetic resonance tomographs, the researchers examined the volunteers’ blood circulation throughout the activities. High blood flow indicated that the nerve cells in the respective part of the brain were particularly active.

Neuroscientist Dr Bernd Weber explains: “One area in particular, the ventral striatum, is the region where part of what we call the ‘reward system’ is located. In this area, we observed an activation when the player completed his task correctly.”
A wrong answer, and no payment, resulted in a reduction in blood flow to the “reward region”. But the area “lit up” when volunteers earned money, and interestingly showed far more activity if a player received more than his partner.

This indicated that stimulation of the reward centre was not merely linked to individual success, but to the success of others.

You may have heard about “keeping up with the Joneses.” This research shows that it isn’t just something that affects a few of the more shallow among us. It is a real human need with a deeply rooted anatomical cause.

So back to the McMansions… what is a man to do… let all of his friends have the bigger, nicer, newer house? It seems that the drive of the ventral striatum outweighed the rational thought process for many people. All the while, lenders and investors, whose ventral striatums were firing like crazy as they tried to rack up larger earnings and returns, respectively, played along to satisfy that same deep seated need to be better than the next guy. The irony, or perhaps the karma, is that most of them ended up looking worse.