The Frontal Cortex

Yesterday, Chris had an interesting post describing an experimental situation in which selective brain damage leads to improved performance. It's an cool paradigm, since it helps to illuminate the innate constraints of the (intact) brain.

Look, for example, at this experiment, led by Baba Shiv, Antonio Damasio and George Loewenstein. The scientists invented a simple investing game. In each round, experimental subjects had to decide between two options: invest $1 or invest nothing. If the participant decided not to invest, he or she would keep the dollar, and the task would advance to the next round. If the participant decided to invest, he or she would hand over a dollar bill to the experimenter. The experimenter would then toss a coin in plain view. If the outcome of the toss were heads, then the participant would lose the $1 that was invested; if the outcome of the toss were tails, then $2.50 would be added to the participant's account. The game stopped after 20 rounds.

If people were perfectly rational (as economists assume), then the subjects should always choose to invest, since the expected value on each round is higher if one invests ($1.25, or $2.50 x 50 percent) than if one does not ($1). In fact, if one invests on each and every round, there is only a 13 percent chance of obtaining lower total earnings than if one does not invest and simply pockets the $20.

What did people do? They behaved irrationally, and choose to invest less than 60 percent of the time. Because we are wired to fear risk (and always try to minimize our fear), most subjects were perfectly content to sacrifice profit for security. Furthermore, their willingness to gamble plummeted immediately after losing a gamble, as they remembered just how painful losses can be.

So far, so obvious: people hate losses, and are naturally irrational when it comes to evaluating risky gambles. But Damasio and Loewenstein didn't stop there. They also played the investing game with neurological patients who had suffered brain damage that silenced their experience of emotion. If the fear of losing money was causing irrational investing decisions, then these fearless patients should perform better than their healthy peers. Their impaired brains should be willing to engage in more risk which, at least in this case, is an advantageous strategy.

That's exactly what happened. Patients incapable of feeling emotions chose to invest 83.7 percent of the time, and gained significantly more money than normal subjects. They also proved much more resistant to the sting of losses, and chose to gamble 85.2 percent of the time after they lost a coin toss. In other words, losing money made them more likely to invest, as they realized that investing was the best way to recoup their losses. It is an irony of economic theory that it only excels at predicting the behavior of patients with serious brain injuries.

Of course, this is an isolated experiment. Suffering from this type of brain damage - and losing the ability to experience emotions - has tragic consequences. You might become a slightly more rational investor, but you also lose the ability to make ordinary decisions in daily life.