'Fear of Losing' Key Emotion in Economic Decisions
THURSDAY Sept. 25, 2008 -- The fear of losing is why people tend to overpay for items bought in an auction, a new study says.
Neuroscientists and economists at New York University reached this conclusion by combining brain imaging techniques with behavioral economic research. Their findings were published in the Sept. 26 issue of Science.
The researchers, using functional magnetic resonance imaging (fMRI), examined brain activity in people playing an auction game with a partner, or a lottery game. While participants could win or lose money in either game, winning at the auction depended on outbidding a partner. Activity in the striatum, part of the brain's reward circuitry, appeared exaggerated during losses in the auction game. The magnitude of this change matched the tendency to overbid, suggesting that the possibility of losing in a social competition, such as an auction, may lead people to bid "too high."
A follow-up behavioral economic study, in which groups played an auction game against a partner under different circumstances, found similar results.
"Such a result would not have been predicted by existing economic theory. While there have been investigations of overbidding which have attributed the phenomenon to either risk aversion or the 'joy of winning,' it was the use of imaging data which allowed us to distinguish between these conflicting explanations and actually arrive at a new and different one, the 'fear of losing.' Our results provide evidence of how an understanding of the neural systems of economic behavior might inform economic theory," researcher Andrew Schotter, a professor in NYU's Department of Economics, said in a university news release.
Neuroscientist Elizabeth Phelps, an NYU professor involved in the research, added: "These results highlight a role for the contemplation of social loss in understanding the tendency to bid 'too high' in auctions and emphasize the importance of considering social factors in economic decisions. By combining neuroeconomic and behavioral economic techniques, we were able to provide novel insight into a classic economic problem."
The U.S. National Institute of Neurological Disorders and Stroke has more about how the brain works.
Posted: September 2008