Friday, July 1, 2011

Your Brain on Credit Cards

Impromptu dinners out at posh water-side restaurants, spontaneous shopping sprees for over-priced camping gear and all that good but crazy-expensive festival fare are just some of the ways we might blow our budgets this Canada Day long weekend. But it doesn’t have to be that way. Even with all those little financial decisions looming large this weekend, there is no reason to jeopardize the household budget. Try practicing metacognition—thinking about thinking—and leave the credit card at home.

When I was at the FCAC-OECD international financial literacy conference in Toronto last month I was fortunate to attend a keynote presentation on consumer choices by neuroscientist and writer, Jonah Lehrer, author of How We Decide. Our consumer decisions, explained Lehrer, begin and end with a tug of war between two tiny but highly emotional parts of our brains—the nucleus accumbens and the insula.

A Tug of War
The nucleus accumbens is part of the dopamine reward pathway, which basically means that it plays a big role in the experience of pleasure and is generally associated with the “good feelings” that lead to addiction. The insula, on the other hand, is the part of the brain that registers nausea, disgust and pain.

Lehrer talked about a neuroscience experiment in which undergraduates were given two hundred dollars spending money, put in a brain scanner and then given the option to buy a variety of goods that would appeal to the average twenty-year-old such as George Forman Grills, Harry Potter books, DVDs and a variety of snack foods. While in the scanner, students were shown a picture of one of these desirable items.

The researchers found that when the consumer product was desirable to the student the nucleus accumbens would “light up and get very excited.” Lehrer said, “The possibility of getting something we want seems to drive consumer desire and the scientists could, in fact, use the relative activation of the nucleus accumbens to predict which items people actually wanted.”

In the second part of the experiment, after they were shown a picture of a desirable item, students were shown the price of that item. When the price was shown, the insula became very excited causing an emotional tug of war between itself and the nucleus accumbens. According to Lehrer, “Scientists could predict with 90 percent accuracy which items people would actually buy by simply looking at the relative activation of the pleasure of the nucleus accumbens and the pain of the insula.”

Credit Cards as "Anesthetic" for the Insula
Back to credit cards. In one of the conditions in this experiment students were allowed to pay by credit card. What the scientists found was that when paying with plastic the negative emotional activity of the insula was greatly reduced as opposed to when students had to pay with cash. The insula was “anesthetized” in the credit card condition as opposed to the cash condition in which the insula seemed to register the pain of giving something up more forcefully.

Commenting on credit cards and the forthcoming pay-with-your-smartphone technology Lehrer said, “The end result is that because we don’t fully experience the pain of spending money, we spend money that we don’t have.”

Lehrer concluded his talk by suggesting that our brains aren't really equipped to handle the modern economy. He encouraged us to use the new science coming out of behavourial economics to analyze our daily financial decisions—to think about how we are thinking about money—so that our household budgets have a better shot at staying in the black, especially on holiday weekends.

A similar version of this article ran in yesterday's Vancouver Sun where I'm guest blogging for Your Money guy James Kwantes while he's on holiday from June 27 to July 8.

Copyright 2011. Laura Thomas. All Rights Reserved.
For reprint permission contact moneyme at telus dot net.

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