News Item: Neuroscience

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Economic Bubbles
& the Brain

Like many people, Read Montague wondered about the inevitable cycles of boom and bust that plague economies.  Being a neuroscientist, he devised an experiment to find out what happens in the brain when investors continue to pour money into businesses, real estate, stocks, and gold, despite the inevitable tumble destined to follow when values rise beyond reason during times of irrational exuberance.

An article in the New York Times Magazine described how Montague gave subjects $100 each to play a game where they invested in various market situations that unbeknown to them mimicked historical rises before crashes.  During the game, Montague monitored their brain activity.

At the beginning, on the economic upswing as the players amassed profits, their brain activity showed nothing unusual.  In keeping with the good feeling that accompanies gratifying experiences, neurons pumped out dopamine, the reward neurotransmitter.  As subjects continued to benefit from the rising market, the dopamine increased their excitement and spurred on more investing as they scrambled for money.

After a while, something strange happened.  Nearing the time the bubble would burst, the neurons slowed production of dopamine, as if to say, “Whoa, there!”  Then just before the run ended, the dopamine neurons stopped firing completely.  Rather than heed the cautionary feeling of that change in mood, investors continued putting money into the market, rationalizing the risks by reasoning their good fortune would go on forever.  The prefrontal cortex, center of higher brain functions like cognition and self reflection, overrode the intuitive feeling in the rest of the brain.

Ordinarily, engaging cognition to manage emotional responses works out well.  Apparently, there are times when thinking processes only serve to justify and defend behaviors that when considered from a different perspective, wouldn’t really make sense.  The prefrontal cortex possesses enormous powers of self deception that can be tempered by paying attention to feelings, a valuable source of additional information.