Understanding the role of emotions in economic decision-making by studying the brain

25 May 2016

Psychologists and marketers recognise emotions as an important factor in decision-making, but economists still don’t incorporate the impact of emotions in their models. Introducing psychological factors and neuroscience into economics, however, would enable economists to make better forecasts, says Jan Engelmann, Associate Professor of Neuroeconomics at the UvA.

Jan Engelmann would never use the MRI scanner at the Spinoza Centre for personal purposes, but the Associate Professor of Neuroeconomics at the University of Amsterdam (UvA) knows very well what the scanner would show if he did. His anterior insular cortex and amygdala, two regions of the brain that preferentially encode negative emotions, would display higher activity because his brain is currently being faced with emotional challenges arising from a real world decision-making experiment involving risk. The German national who joined the UvA in January 2016 had an unpleasant surprise on the morning of the interview. He wants to move his family to the Netherlands and has just been outbid on a house. Now he is wondering what to do next. ‘I’ll probably bid the max, although I know that I might be overbidding out of fear of not finding a suitable home for my family in time’, he says reluctantly.

Engelmann’s research focuses on the neurobiology of social and economic decision-making, particularly how emotions influence our decisions. Based on his research and that of fellow scientists, the neuroeconomist knows what someone in his situation feels, statistically. ‘Pressure on participants in a market, such as the housing or stock market, can lead to very strong emotional reactions. And emotions, such as fear, can even exacerbate herd behaviour and are one factor that can potentially lead to bubbles and crashes in the market.’
While emotions have always been a well-studied research area in psychology, economists tend to ignore the impact of emotions in their models. Wrong, argues Engelmann, who has a PhD in psychology from US Ivy League Brown University: ‘Emotions are important for decision-making.’

Young research area

Neuroeconomics is a relatively new multidisciplinary research area. Engelmann: ‘My task and that of the neuroeconomics field is to introduce insights from psychology and neuroscience into economics.’
Trying to understand emotions and their influences on neural processes related to decision-making is a main focus of his research. He will also conduct research on ways to counteract the potentially negative impact of emotions, adds Engelmann, who until June 2016 is also a Radboud Excellence Fellow at the Donders Institute for Brain, Cognition and Behaviour of Radboud University and earlier worked at the Laboratory for Social and Neural Systems Research at the University of Zürich (Switzerland). ‘I want to find intervention methods for specific groups of people who have difficulties making decisions.’
Drug addicts, shopaholics and teenagers, for example, tend to be highly impulsive and might benefit from strategies that reduce their impulsive decisions. Engelmann wants to provide them with tools that improve their decisions and well-being based on emotion regulation training.
In order to do so, his team will first study the activity levels within the brain’s cognitive control areas while participants face emotional challenges during decision-making tasks. They hope to be able to train these brain networks, because their activity is associated with better impulse control. Ultimately, this research should make it possible to train people’s abilities to regulate their emotions – including people who are vulnerable when taking risky decisions, Engelmann continues. Citing Nobel Laureate and Israeli-American psychologist Daniel Kahneman: ‘We have the ability to use our brain’s cognitive machinery to override our automatic behaviours, especially when the latter are not producing the desired outcomes.’

Wrong incentives

Besides interactions between emotions and cognitions during decision-making and emotion regulation, Engelmann also studies social decision-making, especially related to trust and reciprocity. Together with colleagues from Zurich, he recently showed that empathy – an important factor in social decision-making – can be learned through unexpected positive experiences with other people. Importantly, these experiences shape empathy-related processes in the brain. ‘We have shown that we can influence social emotions through simple interventions. We are now planning on applying the insights gained from this study to other forms of emotions, especially those that are important for decision-making involving risk.’

More information? Email J.B.Engelmann@uva.nl.

By Christine Lucassen

Published by  Economics and Business