This is a busy semester for me but if I don’t take some personal time I’ll go crazy, and nobody wants that. I’m spending the day reading a book my mother recommended to me: Buyology: truth and lies about why we buy, by Martin Lindstrom, one of Time magazine’s 100 most influential people.

Lindstrom works in product branding and oversaw a huge research study using fMRI and SST analysis to look at how the brain works when we think about and buy products. I’m only two chapters in but it’s I think this book is revolutionary (and a bit scary) and I can see why he made Time’s list.

A few posts ago, I discussed the importance of assumption of rational self-interest that we usually make in economic models. A commenter pointed out that people don’t always behave rationally, and I countered by saying that while that might be true, unless you have a better model to explain how exactly they do behave, you don’t really get anywhere. Lindstrom’s efforts are a step in that direction, to account for how our brains behave and incorporate that behavior that into our models.

Let me quickly mention something I often talk about in introductory economcis classes as a way of broaching the topic of experimental economics. In economics, we have a game called the take-it-or-leave-it or ultimatum game. Two people play the game together once: they don’t know who they’re playing against and will never play with that person again. The game’s administrator tells Player 1 that he has 10 $1 bills to split between himself and Player 2. Player 1 has to propose a way of splitting the money between himself and Player 2. If Player 2 approves of the proposed split, the two players split the money accordingly. But if she rejects the split, they both get nothing.

In experiments, we often see people propose 50/50 splits and they’re almost always accepted. Sometimes Player 1 will keep $6 and offer $4, giving himself a little more because he has to make the split. But economists would probably argue that both of those splits are irrational. The way the game should be played is for Player 1 to keep $9 and offer Player 2 $1. Realizing that $1 is better than nothing, Player 2 accepts the split (perhaps bitterly) and walks away with a buck. But in fact, when that $9/$1 split is proposed, it is often rejected, as are other unfair splits ($8/$2 or $7/$3). This article explains that the ventromedial prefrontal cortex (VMPC) has a role to play in emotional decisions, and people with damage to their VMPC have been shown to be more likely to reject what they perceive to be an unfair split. (Note: even dogs have been shown to have some innate understanding of “fairness” — research has shown that when two dogs are both rewarded for performing a trick, and then dog A stops being rewarded for performing the trick, dog B ends up not performing either, out of solidarity.) Other research has shown that when people reject the unfair split, an area of the brain that is associated with feelings of pride lights up with activity. It seems some people feel their pride is worth more than $1, so they reject the split and feel better about themselves for having done so. You might still be able to say that the behavior is rational — they simply value their pride more than $1, so economists have to try to figure out how much a person’s pride is worth to them. However you want to view it, we clearly have to somehow account for how our brains work when we behave in ways that traditional assumptions cannot explain.

Buyology seeks to do some of this, explaining why we do the things we do. We all want to think that we’re rational, but the truth is that we are not always rational. Humans are animals ruled by both reason and emotion, and sometimes the emotion wins out: Lindstrom cites the case of a Coke/Pepsi taste test, where the part of our brain that deals with rationality tells us the Pepsi tastes better, but the emotional part of our brain remembers growing up with Coke and we end up saying we like Coke better. (How do they know this? They perform one taste test first and don’t tell the participants what they’re tasting, then they do another and tell them they’re going to taste Coke, and when they tell people that, they can see that emotional part of the brain light up.) The book also explains why warnings on cigarettes don’t work. When asked, smokers will invariably say that the warnings are effective and cause them to smoke less. But the brain doesn’t lie, and when smokers see warning labels while in a fMRI machine, the area of the brain called the nucleus accumbens (otherwise known as the “craving spot”) lights up. When stimulated, this region of the brain requries higher and higher doses to be satisfied. Lindstrom summarizes these results by saying: “In short, the fMRI results showed that cigarette warning labels not only failed to deter smoking, but by activating the nucleus accumbens, it appeared they actually encouraged smokers to light up. We couldn’t help but conclude that those same cigarette warning labels intended to curb smoking, reduce cancer, and save lives had instead become a killer marketing tool for the tobacco industry.” (p. 15)

Some people are understandably worried about this kind of research: by finding out what makes consumers tick, won’t marketing companies be able to sell us whatever they want, just by pressing the right brain buttons? Won’t political operatives use this to produce the most effective political ads? (Answer: yes, and they already do.) Lindstrom understands that criticism but basically argues that only when consumers know how they their brains work can they account for that and behave accordingly. Knowing that my emotional side wants Coke but my brain wants Pepsi gives me information that I can use to determine which one I really want to rule my decision. I regain control over my decisions, choosing my behavior instead of letting the marketing companies do it for me.

This is one step in the right direction for economists, and hopefully we can replace our simple assumption of rational self-interest with a theory of behavior that is more realistic and at the same time something we can model accurately.