Neuroeconomics looks inside the brain with scanning tools to investigate patterns of motivation and decision-making. Some businesses are profiting. Individuals can, too.

You’re watching Steven Spielberg’s original Jaws for the first time.

At the sound of the two threatening cello notes — dun dun — and the sight of a dorsal fin, tension builds and your heart beats like a rabbit’s.

So what’s going on in your brain when the shark leaps on the boat carrying ill-fated Quint and your popcorn flies out of your hand?

Some filmmakers know. They’re using functional magnetic resonance imaging (fMRI) to measure activity in the viewer’s brain. By analyzing scans of the amygdala — the brain section linked to emotions including fear — they may know precisely at what point the viewer was most afraid. With this technology, filmmakers can identify which scenes are working and which fall flat.

The film industry is capitalizing on the relatively new field of neuroeconomics that in part measures consumers’ neuronal response to product and marketing stimuli. In a broader sense, the field seeks to explain why people make the decisions they do and how they process alternatives. It uses neuroscience and fMRI research as tools to create new economic models.

“Neuroeconomics is one of the newest and most exciting developments in economics right now,” said Simon Wilkie, professor and chair of USC Dornsife’s Department of Economics. “It is addressing some of the fundamental issues that economists have ignored for a long time. Economics has viewed the brain and decision-making as a black box. Our traditional assumption has been that people have well-behaved, stable preferences and they act in a systematic way consistent with those assumed preferences. Using neuroscience, we can dig deeper into how decisions are made.”

At the helm of neuroeconomics in USC Dornsife are Isabelle Brocas, Juan Carrillo and Giorgio Coricelli. Brocas, associate professor of economics, and Carrillo, professor of economics, direct Theoretical Research in Neuroeconomic Decision-making (TREND), the country’s first institute dedicated to the study of neuroeconomic theory.

In research often published in the American Economic Review, they use experimental neuroscience and neurobiology to gather detailed evidence of how the brain works during the decision-making process. What sets this institute apart from other neuroeconomic centers is its grounding in theory rather than experimental behavioral research alone.

“Rather than relying on stated preferences and observed behavior to understand the desires of individuals and predict their actions, neuroeconomics adds a third tool, the direct observation of the underlying mechanisms leading to choices,” Brocas said. “Neuroeconomic theory takes this a step further. It uses brain activity evidence to build models that can explain and predict behaviors.”

Health Insurance or Earthquake Insurance?

For example, people make choices that inadvertently affect their health.

“Sometimes you see people who can’t afford both health insurance and earthquake insurance, so they get earthquake insurance,” Brocas said. “But there’s a greater chance of being diagnosed with cancer than being in an earthquake, even in L.A. If you can figure out why this decision happens you can decipher what kind of correction to take.”

The recent subprime mortgage crisis in the United States demonstrates the crucial need to better understand the underpinnings of decision-making.

“Individuals have systematically biased beliefs about the prospects of their entrepreneurial endeavors,” Carrillo said. “They under-save for retirement and subscribe to mortgages they cannot afford. These behaviors cannot be ignored since they may have disastrous consequences for the economy, as we recently witnessed. Knowing what types of mistakes and biases are prevalent is an important starting point. The main challenge is to understand why they emerge so they can be predicted and possibly avoided.”

In the long run, the research can affect policies.

For instance, research shows that when employees are given a choice to pick a savings or retirement plan, many do nothing. In a phenomenon economists call ambiguity aversion, they don’t invest or save because they must choose one of several plans. To skirt this bad financial move, some companies institute a default action. If employees choose nothing, their employer’s matching contributions automatically go into a plan.

But taking science through to policy-making is an extremely slow process.

“This research potentially has a very high payoff,” Wilkie said. “It’s one of the few areas in economics that has a potential to be revolutionary. An institution like USC, which aspires to be on the forefront of research, should have a diversified portfolio of research activities including some in which the impact is uncertain but the potential upside is very large.”

Peer Pressure Alive and Well

This Fall, Carrillo, Brocas and Coricelli, assistant professor of economics and psychology, have opened a new experimental economics laboratory in Kaprielian Hall. There, they are working with graduate students researching individual decision-making and game theory. They are recording behavior, but also measuring physiological responses, eye tracking and reaction times. Along with behavior, these measurements can help researchers understand motivations behind choices. These studies will provide hypotheses that will be analyzed using fMRI scans, which will help build new testable economic models.

At the University of Arizona, Tucson, Coricelli studied with Kevin McCabe and Vernon Smith, founders of the field of neuroeconomics. As a visiting predoctoral fellow in the late ’90s, his adviser was Smith, who in 2002 won the Nobel Prize in economic sciences.

Coricelli recently led a multi-national team of researchers in a study involving peer pressure. They measured activity in the regions of the brain associated with rewards and social reasoning while participants in the study played lotteries. In a paper published in the Proceedings of the National Academy of Sciences, Coricelli’s team found that the human brain places more value on winning in a social setting than it does on winning when alone.

The researchers found that the striatum, a part of the brain associated with rewards, showed higher activity when a participant beat a peer in the lottery, as opposed to when the participant won while alone. The medial prefrontal cortex, a part of the brain associated with social reasoning, was also more active. Participants who won in a social setting also tended to engage in more risky and competitive behavior in subsequent lotteries.

“These findings suggest that the brain is equipped with the ability to detect and encode social signals, make social signals salient, and then use these signals to optimize future behavior,” Coricelli said.

Coricelli has extensively studied the emotion of regret, research covered in several publications including Nature Neuroscience, Scientific American, New Scientist and The New York Times. He and his team identified the medial orbitofrontal cortex as the brain region that mediates the feeling of remorse, or regret.

In fMRI experiments, volunteers were given two choices, one having a higher risk and the potential for a greater reward. When volunteers chose the less lucrative option then learned the other was better, their medial orbitofrontal cortex, which sits in the brain’s frontal lobe, became activated.

When volunteers were not given a choice and had no control over the outcomes, that particular brain activity was absent, suggesting that personal responsibility prompts the orbitofrontal cortex response. The findings supported Coricelli’s previous research involving patients with damaged orbitofrontal areas who do not experience regret and are unable to change risky behavior to avoid scenarios that would induce that feeling, such as excessive gambling.

Finding a Common Language

Antoine Bechara, professor of psychology in USC Dornsife, has spent his 30-plus-year career researching the neurology of decision-making and addiction. At the University of Iowa, Bechara worked with neuroscientists Antonio and Hanna Damasio, who now head USC Dornsife’s Brain and Creativity Institute and are University Professors.

Bechara was among the first to use fMRI to study brain damaged patients. Working with the Damasios since 1991, he developed what is known as the Iowa Gambling Task, a process that enabled investigators for the first time to detect, measure and investigate in the laboratory patients with injuries to the ventromedial sector of the prefrontal cortex.

In one breakthrough, Bechara and Hanna Damasio were senior authors in a study published in Science showing that smokers with damaged insula quit smoking easily and immediately, suggesting that other addictive behaviors may also have a strong hold on neural circuits for pleasure.

The research — front page news in The New York Times — utilized Antonio Damasio’s renowned discovery in the ’90s pinpointing the insula as the brain region linked to emotion and feeling. The discovery of the insula’s role in addiction opened new directions for therapy and pharmacological developments.

At the turn of the third millennium, Bechara was among the first scholars who participated and helped to develop neuroeconomics. But over the years, he has grown concerned about the movement’s future.

“I’m 100 percent supportive of the field, but I’m not supportive of the current direction,” Bechara said, speaking in general and not about research specifically taking place at USC. “The power of the field is in business; it’s in finance but people have lost sight of that. It’s almost become neuroscience research rather than neuroeconomic research. I’m in favor of driving the field to an area where there are tangible applications.”

There is no need for economists to explain the brain, Bechara said. The only theory explaining human reasoning and decision-making that has stood the test of time has been Antonio Damasio’s somatic marker hypothesis, he said, which purports that emotions play a central role in everyday decision-making. Damasio developed the theory after extensively researching patients with damage to the ventromedial prefrontal cortex. Damasio found that such patients had major deficits in their ability to experience feelings, and make good personal and social decisions.

Neuroeconomics should not try to reinvent the wheel, Bechara said, but should focus on how businesses, corporations and industries — like the film industry, which is already benefiting — can use the research. Businesses would be a major source of funding for the field, he said.

“I applaud when neuroeconomics is taken in an applied manner, but it still needs to be linked to the original neurological theories,” he said. “I think this is necessary for the field to survive.”

While it is too early for a definitive assessment of the maturing field, some lament that the debate has centered on cost and quality of brain data rather than the broader potentials of the research.

Neuroeconomics, Coricelli said, was born from the need to understand basic human behavior and the impact of specific emotions.

“It was clear that there was something missing,” he said. “It was clear there was a need for researchers to interact with other disciplines. At some point it was understood it was time to put people together to try to answer the same question. I’m very excited about working with people from different disciplines. It’s an effort, but you have to find a common language.”

The Ghost in the Machine

John Monterosso, associate professor of psychology, has fully embraced neuroeconomics — or the combined perspectives of behavioral economics and cognitive neuroscience.

“Each perspective has its own accumulation of insights and methodological tools,” he said. “The goal is to find sensible ways to integrate what each has to offer.”

His Self-Control Neuroscience Research Lab probes addictions such as smoking. His team uses fMRI scans to study the brain processes involving decision-making and self-control.

“There is a disparity between what people want to do and what they actually do,” Monterosso said. “In one example, I’m supposed to be writing, but I check e-mails or surf the Internet. Writing a paper is a slow process. Its rewards are big, but they’re not realized during the process. Getting an e-mail from a friend is a much smaller reward, but it’s immediate. There’s a natural tendency to pursue immediate rewards. Motivation prefers immediate over the delayed.”

His research published in international journals such as Drug and Alcohol Dependence is shedding light on the notion of overcoming addiction with will power or strong character.

“From a psychologist’s standpoint, willpower is a ghost in the machine,” Monterosso said. “Everything a person does is scientifically understandable, ultimately. I would like psychology to be able to give accounts of what willpower really is.

“With a new set of scientific data, we can take on this issue that philosophers have struggled with forever. That couldn’t be more exciting. We’re on the verge of it and it’s a lucky place to be.”

Emotionally Yours

In today’s world, think about online trading or investing, Coricelli said. With the Internet, people can invest and trade directly online without the help of a stockbroker. At the prospect of winning, your brain lights up like fireworks. But the fast-paced process doesn’t give the brain enough time to compute the risk of the trade or investment. Online shopping can have the same effect. The growing sophistication of the field has the potential to affect regulations, help businesses prosper and people make difficult financial choices.

Neuroeconomics is about showing you how to understand and perhaps control your emotions. Or, it’s said, they will control you.

Read more:

When we go to the fair and pick a cob of corn over the deep-fried butter, are we exerting self-control — or getting what we always get?

Read more articles from Dornsife Life magazine's Fall 2011/Winter 2012 issue