I believe that North Americans, in general, like the concept of having free choice. They enjoy the concept of being able to decide on matters that will affect them. From what I can tell, this desire to choose starts at a young age. From my own life, I know my daughter enjoys picking the fruit she will eat for breakfast or the snack she will eat in the afternoon. While she usually sticks to picking apples and bananas, every now and then she’ll pick something out of the blue like, say, a raw egg. Now I know that eating a raw egg is not exactly the best dietary choice for a toddler, but she doesn’t know that. However, if I make her eat something else, she will start to pout and get upset she didn’t get to eat the raw egg. While I’m sure many parents can relate to this story, I wonder how many of them realize that as a people, we often act like this too.

Many groups will protest when not offered a choice. They will even petition even if they are. While I’m not politically inclined, I know that if a politician were to impose a new tax increase that there would be a segment of the population that would complain and another that would agree. While perhaps not all parties involved would be aware of every fact, it is quite probable that each one would feel that the other hadn’t thought it completely through. In the end, every person has his or her own view of what is right and what should be done. And while it’s one thing to know what is in your best interests, things really get interesting when you have to decide what’s in the best interests of another party.

The guessing game
Politicians, professors, and even web designers all face the same dilemma in one form or another: figuring out what the people they affect actually want. As a former web designer, I know very well that despite what the web analytics say, or what the sales numbers say, you still aren’t quite sure what people truly want. In fact, even when they tell you what they want, it doesn’t necessarily mean they’ve actually told you what they really want. For example, often users buy a product that in the end they really didn’t enjoy but never bothered to return. Thus, sales figures aren’t a reliable proxy for want. Furthermore, there are times when people don’t know the terminology to describe their wants or when they don’t understand the root cause of what bothers them. Often at times when they tell you what they want, it isn’t really the case. Also, there are even times when users don’t even remember what they wanted in the first place – they just know that they are upset that you presented choices  that disagreed with them (e.g., if you were to be presented with a peanut butter dessert when in fact you were allergic to peanuts). While these examples are simple ones, it is not hard to imagine that the stakes get higher when you start dealing with a nation’s education or retirement plans.

Libertarian Paternalism: a welcome oxymoron for some
Any dictionary will tell you that libertarian paternalism refers to nudging a party to pick an option it would have made anyways if it had enough time and access to the right information (I’m obviously paraphrasing here). In my opinion, no matter how you frame it, Libertarian Paternalism, at its core, is a mild form of coercion. Marketing are masters at this. Marketers subtly sway your choice, be it by a good commercial or a celebrity expert, to pick their product, which they believe to be, of course, the best choice for you. Employers also do this by offering their employees default benefit plans, based on past popularity. They often do this because they believe that what many picked in the past must be the best choice for the population. Know that I’m not against mild coercion or asymmetric paternalism – however you wish to call it, in any way. I’m actually a proponent of it. The fact of the matter is, as a whole, people simply can’t be knowledgeable about every decision they make. I don’t care what some people may say it’s just not practical. If we were to read every disclaimer before installing some software, or research every ingredient found on the side of a cereal box before we bought some, life would become overly cumbersome. Add to this, people’s tendency to procrastinate, choose the status quo and resist being controlled and it’s amazing that anything ever gets done.

Personally, I appreciate a little bit of sway, a little bit of subtle suggestion. I personally don’t mind if someone is trying to steer me towards a choice he feels is best for me as long as I can choose something else if he guessed wrong. Amazon is a great example of a company that gets this right.

I also appreciate this because, while some choices are simple because I’ve made them in the past, some are quite hard as they are foreign to me. Therefore, I appreciate hints and suggestions during times like those. However, it should be said that despite anyone’s best intensions, no one can tell the future, not consistently at least. Thus, every attempt at libertarian paternalism has the inherit risk of harming someone in some way. But, I guess that’s par for the course.

Between a rock and a hard place
There will always be critics. No matter how asymmetric a tactic is, someone will have a beef. If there is a default choice, some will ask, “why that choice?” If there is no default choice, others will complain that they’d rather have someone more knowledgeable choose for them. So what should we do? If you ask me, it’s better to try to make the right choice for someone based on the best information available at that time rather than doing nothing. As long as that someone can choose something else if they happen to disagree and the process is as transparent as reasonably possible, by all means. All I know is that as long as some people still think it’s OK to eat raw eggs, then for some people, a little libertarian paternalism couldn’t hurt.

Craving pudding pops
Emotions are important. Cognitive ability can lead you to water, but it’s your emotions that will urge you to drink. Advertisers have known this for a long time. They know it is better to sell you the sizzle rather than the steak because they know it’s better to reach you on an emotional level than on a logical one. This fact is the reason that many advertisers choose to use celebrity spokespeople.

There’s a classic advertising joke that says to throw in a celebrity if you don’t have a clear messaging strategy. As funny as this may sound, there is indeed some supporting science behind it. There have been findings in the field of neuroscience that state that emotions play an important role in forming memories. Furthermore, it has been found that if a person who endorses a product in an advertisement is considered an expert, viewers would better remember the product endorsed. Thus, it is not difficult to extrapolate that by using a celebrity expert, an advertiser can essentially leverage pre-existing feelings for a celebrity to help form favourable memories of a product. While this is good information for your next Trivial Pursuit night, the role of emotions in decision-making goes much further than this.

Doing the right thing
When faced with a situation that involves making a choice dealing with morals, emotions play an important part in the decision-making process. Feelings of satisfaction have been tied to actions related to fairness, while feelings of disgust have been associated with actions related to moral violation. These feelings act as sign posts or reminders that help steer our actions towards moral behaviours and away from immoral ones. Interestingly, it has been found in subjects with damage to their brain in the areas that modulate emotion, that these subjects are more likely to choose simply utilitarian options and ignore the impact of such choices on others. This may have some interesting implications for the business world. The world of business often prefers cold thinking over emotional reactions. Is it possible that businesses are inheritably immoral because their decisions are constantly encouraged to be made without regard to emotion? The Enron situation and the recent real-estate bubble might be evidence of this.  Of course this is pure speculation.

In any case, if emotions are so important because they affect the decisions we make, then what, if anything, affects how our emotions surface in the first place? The answer to this isn’t so clear-cut. There is a school of thought that says that our personalities are the products of our genes, others say that they are influenced by our environment, while others claim that both play a role.

“Tonight’s draw is for one million dollars”
When I was younger, my grandparents lived with my family. One of our routines was to stay up late on Saturday nights and wait for the 6/49 results to be broadcasted. As far as I know, the numbers they picked never changed, the numbered balls were always dropped into the rotating drum in the same sequence, and the numbers were always drawn approximately the way every week. Yet, despite all the relatively constant variables, the lottery consistently failed at making us rich. While these moments seem like a lifetime away, I can’t help but think back to them as I ponder about the influences of what makes me who I am and what makes me make the decisions I take.

It would be a hard to try to convince me that my genetics map out my personality in its entirety. I definitely have traits that neither my mother nor father had. I love working in an industry that didn’t even exist when I was conceived. So how can genetics explain this? On the other hand, I grew up with my uncle in very similar environments, but we’re night and day in terms of our tastes. The way I see it, if 49 balls can’t be counted on to consistently produce the same results week after week, should it really come as any surprise that identical twins don’t grow up to be exact in every way? Despite each ball having similar “genetics” and environment, they each will follow their own path in the big spinning barrel.

It’s not the destination that counts, it’s the journey
In the end, the debate between nature and nurture is meaningless because those were never the only two players in the mix in the first place. In the case of the lottery balls, a myriad of random variables affect the outcome such as air movement, friction, temperature and plain old luck. In the case of identical twins, though they both may have virtually identical personality potential, how each twin’s personality actually develops will undoubtedly have distinct nuances that will differentiate the two. For example, while they both may have a knack for public speaking, but one may react poorly to uncertainty while the other may feel emboldened by opportunity. So while looking into one’s genomes and environment can give us a good hunch on how we’ll turn out, life is simply to overwhelmingly random to consistently predict every facet of one’s personality.

But let us assume that it was possible to know exactly how people would react to certain stimulus and that it was possible to get the perfect message to the right people in a cost effective way. Would this be moral even if was for the best intensions? Doing so would be risky at best because, in general, society puts a lot of value into the freedom of choice and thought.

And the bonus number is…
If everything was laid out from the onset, would life still be worth living? If it was known that all celebrity endorsements would cause viewers make a purchase, would anyone still watch commercials? If one knew that he would die from a certain disease when he reached 80, would he stop enjoying certain foods? Undoubtedly, there will be marketers looking to leverage the latest findings of neuroscience as there will be definitely a great deal of money to be made by doing so regardless of the moral implications. But in terms of knowing one’s self and one’s own future, in my opinion, certain things should be just left simply to chance. Sometimes you just have to let the chips lie where they may because it makes the lottery called life so much more entertaining and worth experiencing.

What’s the weather like tomorrow?

As a people, we generally like to figure out how something works so that we can affect and benefit from it in the future. To understand this notion, one only has to look as far as the local news broadcast to see that we all want to know is whether we have to pack an umbrella tomorrow. Of course this is not to say that our interests in the future solely reside in the realm of meteorology. Let’s face it. For the most part we are all interested in money at some level. So it should come as no surprise that experts have been trying to model economies and how financial decisions are made for decades. But while some things can be modelled faithfully through expected-value analysis, there always seems to remain a difference between what these models predict and reality.

No matter its size, an economy remains consistent in that it represents the aggregate of all the financial decisions made by the players within it. However, rather inconsistently, when presented with the exact same financial options, these players will, depending on their mood, choose differently from trial to trial. For instance, depending on whether a player has recently suffered a large loss or a meaningful gain will affect whether he selects a riskier investment or behaves in a more risk-averse manner in the future. As it turns out, there is a good chance that this gap can be spanned with neuroscience.

Risky Business

It has been found that the nucleus accumbens (NAcc) becomes more active in anticipation of a gain and prior to risky decisions while the insula becomes more active during the anticipation of a loss and prior to riskless decisions. Related to this, two steroids have been associated with one’s chances of achieving victory. Testosterone has been tied to encouraging what is termed as the “winner effect”; a scenario in which testosterone helps increase a subject’s confidence, which in turn aids his performance, which in turn increases his chances of victory. And if victory is achieved, the subject’s testosterone levels increase even further, creating a feedback loop where he will be more predisposed to taking on increasingly riskier decisions to continue achieving more victories. Conversely, cortisol production has been associated with what could be considered the opposite of confidence: uncertainty and the expectation of a threat. It’s doubtful that cortisol will be featured on a Wheaties box any time in the near future.

Putting the mechanics of execution and budgetary constraints aside, it could be assumed that if the activity level of either the NAcc or the insula of a subject could be determined, that an offer could be framed in such away to be so appealing that, upon accepting the offer, a feeling of significant gain could be achieved. Continuing with this example, this feeling of victory may prime the subject to be more open to further offers regardless of their riskiness. And even further, if the NAcc or the insula were to be stimulated for a prolonged amount of time, it might be even possible to undermine the subject’s cognitive ability altogether. A marketer’s dream, I dare say.

Casinos, perhaps without formal knowledge of neuro-science, are a prime example of exploiting these financial decision levers. They often offer drinks and other incentives to visitors. It could be said that by doing this they are priming people’s NAccs, encouraging them to take risky decisions, such as gambling.  By winning a game here or there, a visitor’s testosterone could also be tipping the tables towards more gambling through the winner’s effect. It makes you wonder what other businesses are also using this knowledge of the brain towards achieving financial gain. But despite the many possibilities of how this information could be leveraged, the more important question is where do we draw the line?

From answers comes more questions

Today’s North American society is more indebted than previous generations, a fact that could lead to financial hardships for many in the future. Should financial institutions, or even the government, play a principle role in reversing this trend? Should more weight be placed on people’s financial well-being in the future versus the present? And if so, by how much? Is it better to have a comfortable retirement at the expense of a delighted present? And if so, how would one craft a message to convince people of this? By using neuroscience, are we heading down a slippery slope? Or are naysayers simply making mountains out of molehills.

Only a few months ago, at the beginning of the current economic downturn, many switched from being financially aggressive to being risk-averse as they cut spending and chose more blue-chip options. Should these people be coerced using reward stimulus to undertake more risky behaviour to help stimulate the economy? What would people say when they got wind that they were being swayed? The game of financial decision influence can quickly become one about playing with fire quite quickly.

Changing the game is appealing but we have to understand the players first

Undoubtedly, with time, the mechanics of how people make financial decisions will be unravelled, just as the human genome was. Indeed with time, the triggers of risky behaviour and risk-averse behaviour will be mapped out and a myriad of models will be validated. But knowing the triggers are just part of the journey. It must be considered that any actions that increase steroid production in one culture will differ in another as what one culture considers risky could be risk-averse for another. Furthermore, moral questions quickly arise the further we delve into the mind. As with the human genome, knowing how to eliminate undesirable traits or even promote desirable ones doesn’t mean that we should use this knowledge in every case.

However this story unfolds, in the end, the future of neuro-finance remains an interesting one; one that not only promises a better understanding of what drives financial decision-making , but upon identifying all of these drivers, one that will mark the official end of “the easy part” for neuro-finance.