Published: April 5, 2012
Professor Drazen Prelec
Researchers at MIT Sloan’s Neuroeconomics Laboratory are exploiting brain-scanning technology to peer into the human mind and test traditional assumptions about how people spend money.
Led by Drazen Prelec, the Digital Equipment Corp. Leaders for Global Operations Professor of Management at MIT Sloan and a professor in the MIT Economics and Brain and Cognitive Sciences Departments, research scientists use functional magnetic resonance imaging (fMRI) at the Athinoula A. Martinos Imaging Center to measure brain activity in experimental subjects making real decisions.
fMRI scanning is an expensive technology but it potentially provides a unique window into brain mechanisms that are active when people consider how much they might enjoy a product, or how much they trust a vendor.
“This could fulfill an ancient dream of revealing what is happening inside the head as we make decisions,” Prelec said. Conscious explanations are not reliable because they tend to reflect what people think are sensible reasons for liking a product or a brand. This is especially important with trust or brand loyalty.
“People may believe that they drink Coke for the taste, but in reality they may be responding mainly to the brand image,” Prelec said.
One of the completed projects at the Neuroeconomics Laboratory, sponsored by Suruga Bank of Japan, investigated whom people trust when they make personal financial decisions online. In the experiment, subjects’ brains were scanned while they considered a series of risky investments, with substantial real money at stake. For each investment there was a small risk that a bank offering the investment might be fraudulent and not return the principal. The only clue about trustworthiness came from a face image of a “bank representative.” It turned out that subjects trusted more the representatives whose faces resembled their own.
“We suspect this is unconscious,” Prelec said. “There may be deep evolutionary reasons for trusting someone who resembles you.” Brain scans suggested that mistrust of a stranger’s face is mediated by a brain structure called the amygdala, which is responsible for rapid, unconscious judgments of fear and mistrust.
Another line of research conducted at the Laboratory focuses on consumer purchase decisions.
“We wanted to understand how people feel about payment and personal finances,” Prelec said. “Should I buy now or save my money and postpone a purchase?” Previous brain scanning research on shopping by Prelec and his colleagues at Stanford University and Carnegie Mellon University showed that brain structures associated with pain were activated when subjects saw a high price appear next to a product that they were considering for purchase. Such pain-of-paying may help explain why consumers favor arrangements that eliminate or disguise payment transaction. For example, subscriptions or unlimited usage plans make it easier not to think about payments. It could also explain why people seem more willing to pay a higher price if the transaction is made with a credit card rather than with cash. The credit card charge may simply be less painful than handing over cash.
The picture of the consumer that emerges from this research is different from the one drawn by traditional economics. On the traditional view, a credit card charge is just a loan, and there is no reason why it should trigger pain or pleasure. A study in preparation at the neuroeconomics laboratory will give subjects a chance to make purchases using different methods of payment, credit, debit, or cash. “We want to explain not only why credit cards seem to ease spending, but also to understand the steady shift to debit cards over the past decade. It is possible that consumers have learned that credit gets them in trouble, and are using debit as an instrument of self-control,” Prelec said.
“A utopian but worthy goal would be to design payment arrangements that help people make the correct decision so they spend just the right amount with minimal stress,” Prelec added. The bottom line is that “we want to understand ourselves. If the best current understanding of human nature is out in the public domain, businesses will make wiser decisions. I think there are lots of missed opportunities to understand genuine consumer needs and problems, and neuroscience can help us here.”