Neuroeconomics is a big buzzword.
Behavioural economics and the psychology of decision-making have rich histories, but with emerging brain imaging technology, we're now able to peer into some of the intricacies of neural processes as they occur while someone is making an important financial decision. The hope is that studies of brain activity will help guide economic theory and practice.
In a study recently published in PNAS, Japanese researchers used functional MRI to examine brain responses to a phenomenon that challenges current economic theories, known as the "undermining effect." They found that people who were most susceptible to this effect also showed greatest changes in brain responses while playing a game that involved financial incentives.
The undermining effect is a well-known psychological phenomenon in which a person is less likely to voluntarily engage in a task after performing that task for some sort of extrinsic reward, such as money or good grades. An example is a potential effect of schooling -- students who are forced to read Shakespeare because they are being graded on it are probably less likely to read Shakespeare for fun afterward than someone who didn't study Shakespeare in school.
The researchers investigated the neural basis of the undermining effect by dividing study participants into two groups and scanning each person's brain twice. Both groups participated in a fun task, called the "stopwatch" task, wherein subjects viewed a stopwatch timer going from zero to five seconds, and they had to press a button within 50 milliseconds of the 5 second time point (if you don't believe this sounds fun, try it for yourself with a digital watch). One group received financial rewards (200 Japanese Yen or about $2.20) for doing this correctly, while the other group didn't receive performance-based rewards. The group receiving financial rewards showed greater activity in areas of the brain previously associated with award, the anterior striatum and midbrain, when subjects were winning money.
Then participants got out of the brain scanner and waited in a quiet room, where they had free time to play the fun game or do anything else. As predicted by the undermining effect, those who were receiving financial rewards for their earlier performance on the fun game spent less time playing the fun game than those who weren't receiving awards. Then all subjects got back into the brain scanner, and they performed the fun task again, but crucially this time nobody received any financial rewards. More free time was given after the second scan, and once again the subjects who had earlier received money for their performance spent less time playing the fun game.
The most interesting finding revealed by analysis of the brain activity was that individuals who played the fun game the least during free time also showed the greatest differences in reward-related brain activity between the two brain scans. In other words, those who felt most rewarded by financial incentives (as measured by brain activity) were the same individuals who were least likely to engage in the fun game when given free time. This suggests that the undermining effect is strongest in individuals who think of money as a reward.
If the goal of neuroeconomics is to reveal information about behaviour that cannot be attained through psychological testing alone, this study appears to have succeeded. Importantly, it shows that each brain responds differently to incentives, and reward-related brain activity can predict the undermining effect within an individual. This is particularly interesting because it shows that not all individuals should be treated as equal in economic models of decision-making and incentive-driven behaviour.
The findings also have implications for policymakers who often implement incentives in domains such as public health and schooling. As demonstrated by the undermining effect, removing extrinsic incentives to engage in an activity can have damaging effects on the desire to voluntarily engage in that activity.
As to whether the study will succeed in impacting economic theory and practice -- that's for the economists to determine.
Murayama K, Matsumoto M, Izuma K, & Matsumoto K (2010). From the Cover: Neural basis of the undermining effect of monetary reward on intrinsic motivation. Proceedings of the National Academy of Sciences of the United States of America, 107 (49), 20911-6 PMID: 21078974