In the last few months, American consumers have undergone a profound shift in their shopping habits. We've transitioned from being incessant consumers - the spendthrifts of the world - to reluctant savers. Here's the Times:
American consumers and businesses are embarking on an era of thrift as the recession deepens, saving more money as they cut spending on purchases as varied as sweaters, new homes and office towers.
Department of Commerce Report on Personal Income and Spending
That was the picture painted by two government reports released on Monday. One showed that Americans cut their spending for a sixth month in December as they worried about losing their jobs and earning less in a deteriorating economy. The personal saving rate in the last three months of 2008 rose to its highest level in six years.
The challenge for policymakers is a daunting one: How do you convince people that now is the time to buy? Fortunately, neuroscience is here to help. A recent experiment, led by researchers at Stanford University and Carnegie Mellon, sheds light on what happens inside the brain when people make shopping decisions. While economists have long assumed that consumers are rational agents and purchase goods based on calculations of utility, that assumption turns out to be false. In reality, every shopping decision is an emotional tug-of-war, as the pleasure of getting something new competes with the pain of spending money.
The experiment went like this: A few dozen lucky undergraduates were given a generous amount of cash and offered the chance to buy dozens of different objects, from a digital voice recorder to gourmet chocolates to the latest Harry Potter book. While the students were making their shopping decisions, the scientists were imaging the activity inside their head with a powerful brain scanner.
They discovered that when subjects were first exposed to the item, a part of the brain called the nucleus accumbens (NAcc) was turned on. The NAcc is a crucial part of our dopamine reward pathway - it's typically associated with things like sex, drugs and rock 'n' roll - and the intensity of its activation was a reflection of desire for the item. If the person already owned the complete Harry Potter collection, then the NAcc didn't get too excited about the prospect of buying another copy. However, if he'd been craving a George Foreman grill, then the NAcc flooded the brain with dopamine whenever that item appeared.
But then came the price tag. When the subjects were exposed to the cost of the product, the insula was activated. The insula is associated with aversive feelings, and is triggered by things like nicotine withdrawal and pictures of people in pain. In general, we try to avoid anything that makes our insula excited. Apparently, this includes spending money.
By measuring the relative amount of activity in each brain region, the scientists could accurately predict the subjects' shopping decisions. They knew which products people would buy before the people themselves did. If the insula's negativity exceeded the positive feelings generated by the NAcc, then the subject almost always chose not to buy the item. However, if the NAcc was more active than the insula, the object proved irresistible. The sting of giving up cash couldn't compete with the thrill of getting a George Foreman grill.
The first thing to note is that retail stores already manipulate this cortical setup. Just look at the interior of a Costco. It's no accident that the most covetous items are put in the most prominent places. A row of high-definition televisions surrounds the entrance. The fancy jewelry, Rolex watches and other luxury items are conspicuously placed along the corridors with the heaviest foot traffic. And then there are the free samples of food, liberally distributed throughout the store.
The goal of these discount warehouses is to constantly prime the pleasure centers of the brain, to keep us lusting after things we don't need. Even though we probably won't buy the Rolex, just looking at the fancy watch makes us more likely to buy something else, since the coveted item activates the NAcc.
But it's not enough to just excite our reward centers: Retailers must also inhibit the insula. This brain area is responsible for making sure we don't spend excessively, and when it's repeatedly assured by retail stores that low prices are "guaranteed," it stops worrying so much about the price tag. In fact, researchers have found that even when a store puts a promotional sticker next to the price tag - something like "Bargain Buy!" or "Hot Deal!" - but doesn't actually reduce the price, sales of the item will still dramatically increase.
These retail tactics lull our brain into buying more things, since the insula is pacified. (Paying with a credit card seems to have a similar effect. Because the actual payment is postponed until the end of the month, the insula doesn't fully process the pain of spending money. Of course, this leads, over time, to rampant credit card debt.)
The problem is that these retail tricks are no longer working; even Costco reported a drop in December sales. When times are tough, the emotional tug-of-war inside the brain is thrown out of whack, and consumers act like everything is overpriced. We're so worried about the dismal economy that the reward areas of the brain are stifled.
Furthermore, this research also helps explain why the dour economic mood can so easily become a tailspin, as bad news makes consumers even less likely to spend money, which leads to more bad news, and so on. (This is what happened to Japan during the1990s.)
I then allude to some economists who are proposing a nationwide 10 percent off sale, subsidized by the federal government.
" This brain area is responsible for making sure we don't spend excessively, and when it's repeatedly assured by retail stores that low prices are "guaranteed," it stops worrying so much about the price tag."
Just wondering what your source is for this information is because as a neuroscience student, your interpretation of what the insula does and "how it thinks" seems to be stretching it to me. I just did a presentation on the insula for a neuroanatomy class and didn't come across a paper describing this phenomenon, so I'd love to fill the gaps in my knowledge. Is it like an anterior insula to orbitofrontal or ACC interaction?
Love your blog!
A couple disagreements:
Your description of the neurological process behind making a shopping decision actually maps very well to rational decision making. NAcc activation maps to the subjective consideration of the benefits and insula activation maps to the consideration of costs. If costs exceed benefits, ie NAcc activation outweighs insula activation, the decision to make the purchase occurs. If anything this seems to be evidence that the fundamental neurological process behind shopping behavior is a form of cost-benefit analysis.
Also, it doesn't really follow that differed payment avoids insula activation. The experiment indicated the insula activation that determines whether the purchase is made occurs when seeing the price rather than during the actual act of paying.
Thanks for your comments. Quick note: the paper is a 2007 Neuron paper by Knutson and Loewenstein. The differing activation of the insula when paying with credit fact comes from conversations with the researchers, but yes the insula seems to project to the medial PFC.
When people don't have any money, yet another part of the brain is lit up with fear and stress, which will override pretty much any signage you can think up.
Spending habits of most Americans played a strong role in causing the current financial mess. Pardon me if I'm skeptical of claims that restoring those spending habits will somehow be helpful.
(But the neuroscience part is interesting anyway.)
enjoy your blogs immensly!!!! Read em several times a week now
but on this shopping thing!!!!,,,, I think we need to move away from a consumer based
economy to a producer export economy , if we expect to have long term economic prosperity
in the future so what neuroscience can lead us to behaviors that will spur us into making
this huge paradigm shift. I mean come on!!!!! Who are we kidding!!!!! We can't keep going on
basing like 70% of our total economy ( number comes from economists) on people spending
money they dont actually have!!!!! So what brain science can help us form the neural networks
that can help us change from consumers to producers?????!!!!!
how many real fundamental useful goods say : made in America. These days
Did the researchers speculate that there may be different responses in brain activity depending on the subjects? What if they used immigrants newly arrived to the US? This could open up a field of cultural neuroscience.
It's interesting to me that people change shopping behaviors so quickly and radically. OK, quickly makes sense: a successful adaptive behavior. But radically? I wonder if it's that what we've been buying is so completely superfluous that giving it up is easy.
> How do you convince people that now is the time to buy?
If rationally-based, make it easy (no sacrifice), or make it crucial (i.e., food)? If emotionally-based, offer sex, babies, or food.
More fundamentally, I wonder that there's not been more on an economy based so deeply on consumption. Anti-materialism has faded, it seems. Maybe we should be asking questions different from how to get people to buy more.
Thanks for the stimulating post.
Place money in a pot and you certainly can stir it. Assumptions get made with incorrect data. Decisions get made without consultation. Interpretations are made with haste.
Sometimes it not yours to give away - money that is - as is proven on many levels at present. Take a deep breath before you decide on a meaning that validates that which may be your ignorance. Wisdom flees sometimes in the presence of paper power.
Love the blog. Love the latest book and love this topic.
Retailers (and all salespeople) have always tried to manage the fear of loss involved in purchasing. Discounting is one of the most popular means of doing this. There is plenty of evidence that the "framing" of the discount offer has more impact than the discount itself on reducing fear of loss. It is possible to offer the same discount framed differently and make it more appealing. Prospect theory deals with the psychological impact of a perceived loss being greater than that of gain. It seems that our insular cortex is pretty finely tuned.
There is also plenty of evidence that discounting is not the most effective means of managing the fear of loss. A 10% discount does not mitigate fear if the buyer does not trust the retailer...or thinks that a better deal is available elsewhere or later in time. In fact, it may increase it.
Good retailers increase desire and manage the fear of loss by an enormous variety of means.
Presumably effective retailing involves inreasing desire and managing fear of loss.
I wondered why choices made in the past raise questions now.Thanks for opening eyes to happenings behind those eyes.My future choices are a whole new process.