Oxytocin and You

I read an interesting story last week about the new field of neuroeconomics. Scientists are trying to understand what happens in people’s brains as they make economic decisions.

One good reason for this research is that traditional macroeconomic models of how economies work are not all that trustworthy. Microeconomics doesn't do much better. You don't have to read the business news very long to realize that there are a lot inconsistencies between economic theory and the real world. These scientists are trying to get a handle on what happens in the brain as these decisions are made. After all, much of what happens in our economy is a result of the billions of decisions that millions of people make.

We all know that there are basically two brains, one is emotional and the other rational. The emotional brain is more concerned with the present and is seeks outcomes that result in immediate gratification, like spending money. It seems to have a tough time evaluating future outcomes. The rational brain, on the other hand, knows that spending money today detracts from the money that is available for long-term investment, as in saving for retirement. As a result, many economic decisions result in conflict between these impulses.

Researchers are trying to "map" the brain, seeing where activity occurs as decisions are being made. In one of the experiments described they had two people play an “economic game” while they were in a Magnetic Resonance Imaging (MRI) machine that allows their brains to be scanned real-time. In this game each participant had a number of opportunities to trust the other participant, or to betray that trust. The researchers felt that the development of trust must show up somewhere in the brain.

As it turns out, this is true. As the game progressed, the scientists could actually see brain activity increase in certain areas as the result of the decision to trust was revealed. When trust is developed there is an increase in levels of the hormone oxytocin. Like endorphins that are released in the brain by other activities it literally feels good to trust another person and to cooperate with him. This was not necessarily obvious because the way the game was constructed, there were opportunities for greater economic payoffs by betraying trust.

Thinking about this research confirmed two things that I believe. The first is that much of mortgage marketing is specifically designed to appeal to the part of the brain that is derives pleasure from immediate gratification. One example is the current craze over the "option loan," the negative amortization loan with the very low initial payment. In the last twenty-five years there have always been loans like this around and plenty of suckers to take them. Of course, I get to see them a few years later and we un-do the damage.

Another model designed to appeal to the emotional brain is the loan that has very low initial costs. People like "free" or "closing costs are only $395" advertising and they respond. Of course, in both of these cases, if the rational brain could be engaged to ask about the long-term implications of these decisions, a lot fewer of these loans would be done.

As those who have read a lot of my articles know, I am fascinated by consumer behavior, particularly how people decide what mortgage to get and from whom to get it. My experience is that most people let their emotional brain run the show. With many clients I have to help them un-learn old methods and adopt methods that result in better results for them. We do this by engaging the rational brain. We talk about long-term goals and how best to reach them.

This does not mean that they don't feel good. I hope that with all of my clients, the good feelings come about as a result of an oxytocin jolt they get by realizing the benefits of cooperation rather than one that comes from some hokey appeal to immediate gratification.

For those who would like to see the entire article, please e-mail me at randyj AT loan-wolf.com and I'll e-mail it to you. For those who are interested in even more information about behavior patterns, there is an article in the latest Scientific American magazine about monkeys and how they learn cooperative behavior. We're primates too and I think that the parallels are amazing.