Posted by on 19 March 2005 at 7:57 am  Uncategorized
Mar 192005

This week’s issue of Business Week has a nice overview of “neuroeconomics”, which is the study of economic decision-making using advanced functional brain imaging techniques. Of particular interest to Objectivists are the studies that reveal when people tend to use reason to make decisions, and when they tend to discard reason in favor of whim/emotionalism.

Of course, there are many uses for this kind of research. In particular, if you participating in any kind of efficient marketplace, and a situation arises which causes some of the less rational investors to disregard reason and instead rely on emotion to pay significantly less (or more) for an item than they should, then this would create an excellent buying (or selling) opportunity for the more rational investors.

As a classic example, investors who have performed the proper fundamental analysis of a stock’s worth and know that the company has good long-term prospects are often still tempted to sell their stock when there is a temporary downturn in the price, just because they see others selling. Investment books are full of advice not to panic in those situations and ride out the short-term trend. A more detailed scientific understanding of the circumstances under which people can be tempted to act against reason could be beneficial, both in terms of enhancing one’s personal wealth, as well as helping to improve the overall efficiency of marketplaces (as more and more smart investors use this knowledge to take advantage of short-term bubbles, thereby reducing their size and duration, and thus more quickly driving the prices back to their rational values).

Another potentially interesting trend is the related field of “neuromarketing”. Some preliminary studies have shown that Coca-Cola’s advertisement and branding have been far more successful than Pepsi’s in creating strong positive cultural associations of their product amongst consumers, and that these emotional associations will influence which drinks consumers say they prefer. According to one article in the New York Times:

When researchers monitored brain scans of 67 people who were given a blind taste test of Coca-Cola and Pepsi, each soft drink lit up the brain’s reward system, and the participants were evenly split as to which drink they preferred. But when the same people were told what they were drinking, activity in a different set of brain regions linked to brand loyalty overrode their original preferences. Three out of four said that they preferred Coca-Cola.

If one reads past the usual negative commentary about the “Orwellian” nature of the work, the prospect of being able to create a sound scientific basis for measuring the effectiveness of marketing and advertising should be very exciting for capitalists. (Here’s a more detailed article on the Coke-vs.-Pepsi experiments.)

As functional MRI become cheaper and more widely available (both in academia and in private research labs), we should expect to see more and more of this kind of work.

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