I'm always fascinated by the ways in which societal issues impact the research program of modern neuroscience. (After all, the virtue of studying the brain is that it can be made relevant to just about anything, from the formation of financial bubbles to internet searches.) We're still living through the aftermath of the Great Recession, which was obviously caused by a number of factors. But one clear cause was the astonishing number of bad mortgages, many of which were in the subprime category. These mortgages were made possible by irresponsible speculation on Wall Street, but they also involved some spectacularly bad decision-making on the part of consumers, who took out big home loans they couldn't afford. (It's worth noting, of course, that in some instances these decisions were influenced by fraudulent and dishonest brokers.)

Let's look, for instance, at 2/28 mortgage, one of the most popular subprime variants. The structure of the loan is simple: there is a low, fixed-interest rate for the first two years (aka the teaser rate) and a much higher, adjustable rate for the next twenty-eight. In other words, the loan works a lot like a credit card: it lets people get a home for very little up front, but then hits the borrower with high interest payments at some point in the distant future. By the time the housing market went bust in the summer of 2007, subprime loans like the 2/28 accounted for almost 20 percent of all mortgages. (Some neighborhoods, of course, fared much worse, with more than 60 percent of all mortgages falling into the subprime category.) Unfortunately, this popularity came with a steep cost. Once the rates start to riseâ¯and they always doâ¯many people can no longer afford the monthly mortgage payment. That's when you get a foreclosure.

On the one hand, subprime mortgages make no sense. Over the lifetime of the loan, a homeowner with a 2/28 mortgage will be pay far higher rates and make far larger interest payments. (Of course, many homeowners assumed they'd simply refinance their mortgage within the first two years, which is why, during the peak of the housing boom, 55 percent of all 2/28 mortgages were sold to homeowners who could have gotten prime mortgages.) So if the 2/28 loan is such a bad idea, why did so many people do it? The answer involves the inevitable temptation of immediate rewards. We want something now, and so we discount those future costs; the emotional pull of the present is simply too potent. As Plato might have put it, the passionate horses are pulling the rider against his rational will.

What does this collective failure have to do with neuroscience? Last week, I blogged about an interesting new paper that looked at how thinking about any event in the future can help us resist the allure of instant gratification. Now comes another interesting paper that uses transcranial magnetic stimulation (TMS) to better understand the causal relationship between activity in certain brain areas, such as the lateral prefrontal cortex, and the ability to make rational decisions about the future.

The experiment used the standard paradigm: subjects were given a choice between receiving a larger amount of money next month, or a smaller amount right now. By changing the amounts of money on offer, the scientists were able to generate different responses. For instance, while most people would wait for $35 next month as opposed to $20 right now, they wouldn't wait when only offered $21 next month. So far, so obvious: our tendency to delay gratification depends upon the incentives.

In recent years, there's been a number of experiments that have asked people these sorts of questions in the brain scanner. The results have been a bit confusing. Here's Joseph Kable, a psychologist at Penn, summarizing the data:

Although some functional imaging studies have observed greater lateral prefrontal activity when people choose larger, delayed rewards over smaller, immediate ones, others have not replicated this finding. Similarly, although some lateral prefrontal regions show increased activity in more patient individuals, other lateral prefrontal regions show the opposite effect. Furthermore, although decreased gray matter in lateral prefrontal regions is associated with greater impatience, damage to dorsolateral prefrontal cortex does not seem to affect decision-making regarding delayed rewards.

Confusing, right? Imperfect tools give us noisy data, and fMRI is a very imperfect tool. Brain damage can also be ambiguous, as different parts of the tightly interconnected PFC can compensate for local damage. Here's where TMS comes in handy. TMS involves rapidly oscillating magnetic fields, which can generate weak electrical currents in brain tissue. This leads to a collective depolarization in a specific brain area - the pulses of TMS can be narrowly focused - which makes it harder for that bit of tissue to become excited and exert its influence. The end result is that it's possible to selectively and temporarily "knock-out" circuits in the brain.

This latest study, led by Bernd Figner at Columbia, used TMS to disrupt the lateral prefrontal cortex while people were debating whether or not to delay for a larger reward. The end result was that people became much more impulsive: when the massive beam of electromagnetism was aimed at our forehead, we found it harder to delay gratification, and became significantly more likely to choose $20 right now, instead of $25 next month.

Interestingly, the TMS beam didn't disrupt our desire for the rewards. Although subjects had a largely incapacitated lateral PFC, they still assigned the various rewards the same level of attractiveness. What this suggests is that the lateral PFC doesn't compute the subjective value of things. Instead, it represents a modulatory signal that selectively favors the future, and allows us to discount the impulses of the present moment. In other words, it turns down the volume knob on our desires, so that we can make a more "rational" decision. Because TMS is reversible, this elegant study adds to the growing weight of evidence that the lateral PFC plays a causal role in delayed gratification.

We're living in an age that lived beyond its means. If we're ever going to move beyond these tiresome conversations about defaults, foreclosures and debt, then we're going to have to learn to live without, to forgo the instant pleasure for the delayed reward. That's not an easy thing to do, but we're beginning to learn how we do it.

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Hi Jonah,
Neurologically, that frontal cortex is helping us to rationalize, reason and make decisions...what about the reptilian brain, which is simultaneously shouting out, "Survive! Hoard, take more and make sure your klan has plenty!" It seems like a battle between synapses.....any insight on what the brainstem was doing throughout the study?

While instant gratification is no doubt one reason for the popularity of teaser rates, I believe there is something else going on as well: namely, the tendency to extrapolate from trends rather than worry about fundamentals.

If a buyer believes that the price of their home will go up significantly, it makes sense to accept a teaser rate (and refinance/sell later), especially if the buyer is liquidity constrained. Similarly it makes sense for the lender to make loans even to those who clearly cannot pay out of their current income - as long as the value of the collateral rises fast enough (ideally, even faster than interest rates), the borrowers income/potential income are irrelevant.

I loved the link on your December 2009 post - Bubbles. Is there anything more you could say perhaps about the brain's tendency to extrapolate rather than consider fundamentals? It seems reasonable considering that extrapolation is probably more computationally efficient for the brain from an evolutionary standpoint.

P.S. your posts are awesome!

Economists... *shaking my head* One can only hope this crisis has given behavioral economics a boost, and that the thought that human beings are perfectly rational utility maximizers will loose political influence as soon as possible.

A new foundation for politics should be sought in positive psychology and our rapidly growing understanding of human nature and the brain. Over the last five years, Google Trends show a doubling in the search volume of "happiness". There seems to be something in the air.

Subprime mortgages should probably just be banned. Debt should not be taken lightly, because as the debt grows, the likelihood of a bubble rises and more importantly, the economic system becomes less resistant and less capable of taking a blow. Regulations need to take human biases into account, because our rationality is deeply imperfect, and we will screw up in predictable ways as long as the system allows it.

it looks like impulsive/compulsive behavior around money likely has similar physiology to other addictions, primarily inherited deficits in dopamine receptors...basically it's a reward pathway that is born/set hypo, so the 24/7 craving is for hyper-(usually self-harming)-behavior to get to "normal" dopamine levels, which is impossible with any addictive disorder...with the new fMRI technology coming out targeting dopamine specifically we'll know more for trader behavior that's seems an extreme version of the disorder....socially-acceptable as well...

Buying a house to satisfy a need for some form of immediate gratification is a gross oversimplification of what's going on there. Everything we do has an aspect of immediacy as part of the satisfaction we get from having decided to do it. But in buying a house, we're buying (or think and hope we are) an improved chance at future gratification. That's what's being sold us by the sub prime mortgage schemers. That's what seems to make this fool's gamble worth the risks. That's a big part of why so many people took that manufactured opportunity to "secure" their futures.
There's no way to "forego instant pleasure for the delayed reward" if in fact we believe we are buying a delayed reward and gaining pleasure from so doing. Every pleasure from every satisfation is in some sense immediate.

There's another aspect you're not considering. If the originators were forced to keep the loans on their books, they probably wouldn't have made as many of these. If you sell it on, how do you get people to agree to buy them? One of the main ways to do this is to not fully represent the credit worthiness of the borrower and the level of income with which they are planning to support their mortgage.

If delinquency, foreclosure and default rates can be forecasted on reasonably complete data, then the teaser rates would need to be much higher to support the level of securitization that occurred. One of the biggest predictors of failure to pay a mortgage is the number of other credit cards and/or mortgages a borrower holds. this data was simply not available to anyone modeling default rates for the purpose of determining prices at which to buy loans.

This is not to say that the resulting models would have necessarily produced the best results regardless, but the teaser rates, in many cases, were created with the intention of hiding relevant information while trying to sell on the loans. it's not like the originators have complete control.

Things like subprime mortgages make sense if you understand that low interest rates are a signal that people should be making (and taking) more risks in the economy. When the government puts downward pressure on interest rates, it creates a bubble. Eventually, that bubble bursts. And here we are.

I wonder if a stellate ganglion block could be used to enhance impulse control? This treatment was recently shown to be effective for PTSD which seems a good model for impulse control disorders.
Walter Reed Report Confirms Validity Of Fast-Acting, Non-Drug PTSD Treatment
30 Apr 2010

Walter Reed Army Medical Center in Bethesda, MD, has published case reports detailing the successful treatment of combat-related post-traumatic stress disorder with a stellate ganglion block.

SGB is a 10-minute procedure during which local anesthesia is injected next to the stellate ganglion, a collection of nerves in the neck....

By Nerissa Belcher (not verified) on 07 May 2010 #permalink

I am curious. Does the cell phone discharge electromagnetic signals? If so, does our use of cell phones cause us to become more impulsive?

Very interesting study. Thanks for explaining it clearly.

For ten years, I've moderated support groups for the partners of adults with ADHD (and in recent years also groups for the adults themselves). What I've seen in these personal, domestic relationships around financial matters was mirrored by society at large.

That is, one partner shopping impulsively, chasing the stimulation, spending retirement money (or never putting any aside), piling up so much clutter from eBay that rooms become impassable, and so forth while the other partner stands by helplessly. Attempts to control the spending often prove futile, as secret credit cards are issued, re-fi's clandestinely procured, etc.

It's important to note that not all adults with ADHD (diagnosed or not) are profligate spenders. Some even go the other direction (ADHD is, after all, an issue of dysregulation, often swinging to extremes in either direction).

But it's equally important to note that, left unaddressed, ADHD symptoms are associated with higher rates of bankruptcy, lower rates of savings, and other financial distresses. Untreated ADHD can mean costly self-medication strategies, and not just in finances.

With an estimated 10-30 million adults in the U.S. alone thought to have ADHD (and only 1 million diagnosed, though far fewer actually in treatment). it's obvious to me that we will never get a handle on financial reality in this country until we come out of our collective denial about the role neurocognitive brain disorders play in personal and national financial decisions.

There have been a number of studies that look at the various brain regions active during meditation and the lateral prefrontal cortex is one of them. I submit that meditation is the 'cadiallac' (this choice dates me...not sure what the green, savy equivalent would be...hybrid?) of techniques for training in delayed gratification. There you sit, being instead of doing, and having to label as thinking and drop all the items on your to-do list, as well as self flagellations and random ruminations, not to mention ignoring impulses like picking your nose or scratching your toe. One is even instructed to acknowledge and dismiss as thinking any high-falutin insights or ideas that might pop up. If they are that good, you will remember them until you get up, it is said.

I hope this does not mean that there will be hidden TMS beams planted in retail stores, banks, and other places where financial decisions are made, in order to "influence" someone who is trying to make a financial decision.

The era of my interest is a time when self-control was paramount.

"Use it up
Wear it out
Make it do
Or do without" is more than a momentary decision: it's a whole different approach to life.

Even the act of securing something now for the future, such as a savings bond or savings account could be perceived as an impulsive act. Many people gamble compulsively with the thought that they could procure enough rewards to stabilize their future and live out their sought existence. However when people prey on more sound actions such purchasing a house or insurances such as life insurance only to trap the purchaser into a lifetime of credit debt is downright wrong! The thing thatâs outraging is that the big business companies and investors behind all of this get âBailed Outâ!! With our money!! If actions are not taken to stop bad business practices such as these then our current situation as a whole âas a country- will not improve.

You are one fascinating fellow Jonah, with some equally fascinating blog followers. This is one incredible article on the subject of patience. Fortunately, we humans do not 'learn less' and impulse control behaviors (like many others) are learnable. We may forget, or need to repeat the lesson.
For those unfortunate folks who have a true neurological malady, maybe one day neuroscience will provide a therapeutic answer. Beam me up, Scotty, I say - along with many of our government representatives and Big Corporate Industry officers and executives. Bring it on!
As with this treatment of patience, I look forward to the day when we have fully studied "greed" and find that it is an illness just as problematic as narcissism and similar other conditions (and Scotty has a treatment for that, too).
Best to you all.
Cheers, Dolly

Thanks for this article. I might also like to express that it can always be hard when you are in school and just starting out to establish a long credit ranking. There are many college students who are merely trying to endure and have an extended or good credit history can be a difficult matter to have.