In many situations people spend too much money on things that have direct tangible benefits like material goods and too little money on things that only the transient experiences, things like vacations or social interactions.

Decisions happen in the brain

It’s important to note that both pleasure and tangible benefits matter, but they aren’t the whole story. So if value isn’t explained by pleasure nor by tangible benefits what’s left? To answer the question will move from economics and into neuroscience.

There are something like 100 billion neurons in your brain, each of those receive signals from hundreds or even thousands of other neurons, then integrates of signals and forwards the output to another part of the brain. The location of the neuron will focus on is within the brainstem.

The neuron we care about is located in a tiny structure within the brain stem called the ventral tegmental area. That’s a mouthful, so will refer to it by its abbreviation ventral tegmental area or VTA. There aren’t many neurons in the VTA, of the hundred billion neurons in the brain only about half million of those neurons are in the VTA, but those neurons are critical for our ability to make decisions.

The dopamine of decisions

Like all VTA neurons our neuron contains a neurotransmitter dopamine. Since dopamine has become quite famous in the popular media I want to take a brief digression and provide some sense of how neurons use dopamine and other neurotransmitters to communicate.

The key idea is that with in each neuron signals travel electrically, that is electrical currents travel along the membrane walls of the neuron. When one neuron sends signals to other neurons those signals travel from the cell body at the center of the neuron down the long wire called an axon.

If a thin electrical wire is then inserted into the brain next to one of those neurons, that wire can record those electrical signals and bring them to a computer. The sound you’re hearing right now is that electrical signal, each of those clicks represents a single electrical signal moving along the neuron.

It had long been recognized that dopamine neurons in the VTA and other nearby structures are critical for movement an action. Degeneration of brainstem dopamine neurons has long been known to be a hallmark of Parkinson’s disease which can lead to an inability to control voluntary motor movements to rigidity or to uncontrollable tremors.

The reward prediction error

The first fundamental property of dopamine neurons they do not respond to rewards themselves but to the difference between expectation and reality. This concept is now known as reward prediction error.

Think about some time that you received unexpected praise say a compliment from a friend at a party or from a colleague at work. How did you feel? That praise was probably very rewarding to in large part because it was unexpected. You thought that you are having a normal conversation in the compliment arrived out of the blue.

Unexpected positive events like that increase the activity of our brain’s dopamine system, but suppose that you are expecting praise save for your role on a project at work and then a colleague simply thanks you without particular warmth or enthusiasm. How would you feel then?

You’d probably feel disappointment, even though you received a bit of thanks that was less effusive and less heartfelt than you expected. Events that are worse than our expectations decrease the activity of her brain’s dopamine system.