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The New Yorker: PRINTABLES: "




MIND GAMES
by JOHN CASSIDY
What neuroeconomics tells us about money and the brain.
Issue of 2006-09-18
Posted 2006-09-11

Like many people who have accumulated some savings, I invest in the stock market. Most of my retirement money is invested in mutual funds, but now and again I also buy individual stocks. My holdings include the oil company Royal Dutch Shell, the drug company GlaxoSmithKline, and the phone company British Telecommunication. I like to think that I picked these stocks because I can discern value where others can’t, but my record hardly backs this up. I invested in BT in 2001, shortly after the Nasdaq crashed, when the stock had already fallen substantially, only to watch it slide another fifty per cent. I should have sold out, but I held on, hoping for a rebound. Five years later, the stock is trading well below the price I paid for it, and I still own it.

I sometimes wonder what goes on in my head when I make stupid investment decisions. A few weeks ago, I had a chance to find out, when I took part in an experiment at New York University’s Center for Brain Imaging, in a building off Washington Square Park. In the lobby, I met Peter Sokol-Hessner, a twenty-four-year-old graduate student, who escorted me to a control room full of computers. Sokol-Hessner is completing a doctorate in psychology, but he is currently working on a research project in the emerging field of neuroeconomics, which uses state-of-the-art imaging technology to explore the neural bases of economic decision-making.

Sokol-Hessner is particularly interested in “loss aversion,” which is what I was suffering from when I refused to sell my BT stock. During the past decade or so, economists have devised a series of experiments to demonstrate just how much we dislike losing money. If you present people with an even chance of winning a hundred and fifty dollars or losing a hundred dollars, most refuse the gamble, even though it is to their advantage to accept it: if you multiply the odds of winning—fifty per cent—times a hundred and fifty dollars, minus the odds of losing—also fifty per cent—times a hundred dollars, you end up with a gain of twenty-five dollars. If you accepted this bet ten times in a row, you could expect to gain two hundred and fifty dollars. But, when people are presented with it once, a prospective return of a hundred and fifty dollars isn’t enough to compensate them for a possible loss of a hundred dollars. In fact, most people won’t accept the gamble unless the winning stake is raised to two hundred dollars."

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