I have been reading Your Money and Your Brain. Why we make bad decisions and how to avoid it according to neuroeconomics, by Pedro Bermejo (neurologist, doctor in neuroscience, and master in behavioral biology) and Ricardo Izquierdo (consultant, master in computer security).
Source: Christopher Zacharow
Pedro and Ricardo are co-founders and president and vice president, respectively, of the Spanish Association of Neuroeconomics.
The authors divide the text into twelve chapters:
- Why do we think one thing and do another?
Yes, the brain is the most complex structure in the known universe. The last part of the twentieth century was called "the decade of the brain". In 1994 Antonio Damasio published Descartes‘error, which emphasized the role of emotions in decision making. In 1998, neuroscience emerged as a research line with Paul Zak. A year later, the first scientific article on neuroeconomics was published in Nature.
In 2003 Gerald Zaltman, from Harvard, published How Customers Think and in 2002 Daniel Kahneman (father of Neuroeconomics) received the Nobel Prize in Economics for his "perspectives theory”. Sciences such as: Neurofinance, Neuromarketing and Neuromanagement were born with Neuroeconomics.
- Cognitive and emotional methods are the bases of neuroeconomics.
The first is an objective and reproducible way; the second a subjective, inaccurate and quick one. We used the emotional and intuitive method due to its speed and because it has sparked some emotion. The authors cite as example the "tulip bubble" from the last part of the Sixteenth Century in Holland.
- Neuroanatomy of economic decisions:
The system of reward and risk aversion. Dopamine acts through three levels in the brain reward system: encouraging the necessary actions to get the reward, facilitating learning to achieve it and fixing attention on that reward.
The reward system acts in the prefrontal cortex (that manages emotions), the limbic system and the accumbens nucleus (brain center of pleasure and desire). In the risk aversion system the amygdala, insula, hypothalamus and locus coeruleus are involved. An example is to play in a casino.
- Financial bubbles and stock market cracks:
Already in 1916, Clement Juglar demonstrated that crises are cyclical. Its phases are: reactivation (optimism, excitement), boom (euphoria), crisis / recession (fear, despair), depression (panic) and again reactivation (relief, optimism). Serotonin is the brain chemical involved in the acquisition of numerous social behaviors.
"To effectively manipulate people, you need to convince that nobody manipulates them" (J.K. Galbraith). Drucker defined marketing in 1954 as "the vision of business from the customer's perspective" and 45 years later research began with neuroscientific techniques at Harvard (FMRI, EEG).
The main results of this discipline: gain or loss produces a biological change with direct effects on the brain and organism; against the repetition of stimuli, our brains unconsciously thinks that the stimulus will be repeated again; achieving a reward causes neuronal activity similar to cocaine or morphine; economic losses are recorded in the same area of the brain as the pain or risk of death are recorded; expectations of events produce more intense emotions than the actual events.
"Google" effect (activate the accumbens nucleus by money, sex, gifts, tobacco, alcohol, halo (everything good), devil (everything bad ), herd (where people go), fear (is less if others suffer, too), and other misperceptions.
- Factors determining purchasing processes:
Colors (red is power and passion, green is youth, blue is trust, purple is luxury, sophistication is black, yellow is affability, orange is comfort, pink is sweetness, brown is warmth, white is sobriety), sound (romantic music, rock, pop), smells (shoots contemplative buying 14% and none of the impulsive one), touch ... multisensory advertising.
- Neuromarketing applied to customer needs and brand positioning.
Maslow's pyramid serves to identify the needs of consumers. The probability that a client detects the most expensive wine is 50% (pure chance). Example: the "Pepsi Challenge" (which is a triumph of Coca-Cola as a brand).
- Neuromarketing applied to pricing strategies:
A sense of justice and fairness. We form perceptions of "high price", "unacceptable price", "unfair price" and also optimal, magical, expected, normal and prestige price (the most expensive is the best). Example: Nespresso (10 capsules with 50 oz of coffee at 3'30 €; 66 € the Kg. Illy is at 17'25 €. A 0.33 € capsule seems insignificant).
The Peter or incompetence Principle (linear development), expectations (Pygmalion effect). Trust in others has to do with oxytocin. Handsome people earn 12% more than ugly ones.
- Differences between male and female brain.
In 2001 a study was conducted over trading operations: men made up to 45% more, with a 1.4 % less annual return. Single men did 67% more operations with a profit of less than 2.3% compared to single women. Age does not influence decision making, except in financial issues (younger, due to less dopamine).
- Environmental influences on decision making.
"No one would remember the Good Samaritan if he'd only had good intentions; he also had money" (Margaret Thatcher). The light intensity makes prices go up (2003) and reduces our memory. Not sleeping affects our decision making (Duke University).
- Investments and purchases based on Neuroscience.
Five premises, no one can predict the future, companies with high expectations are especially dangerous, "the secret to making money in the stock market is to buy when everyone else sells and sell when everyone buys" (Warren Buffet), be careful with our expectations.