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A Common Currency for Value

At some point in our decision-making we have to construct a common currency for value. Let’s see how our brains do that.

How the brain computes a value

Think back to the last time you felt hungry, perhaps you skip breakfast or work through dinner or had a day full of exercise. Suppose that I’d offer you one of your favorite snacks right at that moment, perhaps a bag of pretzels some fruit or candy bar. How much would you have paid for that snack?

That seems like a simple question right maybe you pay a dollar maybe a few dollars maybe only a few cents, but if you were hungry and are offered a favorite food you’d pay something.

The economist turned neuroscientist Antonio Rangel working with the marketing scientist Hilke Plassmann has used this sort of simple decision to understand how the brain computes a value. If you are a participant in one of their experiments you fast for part of the day and encumber the research laboratory hungry. You then lie down in an FMRI scanner in view a series of familiar brand-name snacks crackers chips candy and so forth.

When each stack appeared on the screen and indicate how much you’d be willing to pay for it and when the experiment ended stay in the laboratory even hungrier than before. The researchers then choose one snack randomly and sell it to you for the price you were willing to pay.

This is a clever approach, take hungry people and sell them snacks while measuring the brain function, but it rests on the assumption that people will tell the truth about their subjective value, setting up the experiment the wrong way in contrast could give people incentives to lie, they might underbid their true price so they don’t have to pay as much.

A Becker – DeGroot – Marschak Technique

So I want to take a quick digression to explain how researchers give people an incentive to tell the truth. A common technique is used something called a Becker-DeGroot-Marschak or BDM auction. It was named after the economist who developed it more than 50 years ago. This technique introduces an element of randomness into the transaction, in order to prevent people from trying to shade their true will willingness to pay.

Suppose that you are hungry and when you’re given the opportunity to buy a favorite snacks, say an apple, you’d be willing to pay as much is two dollars for that apple but not willing to pay more. The goal of the BDM auction is to ensure that you have no incentive say anything other than two dollars when asked how much you be willing to pay.

The key trick introduced by this auction is to determine the actual selling price randomly. So after you bid two dollars that apple the experimenter determines the price using a random number generator, such as rolling a dice. If that random price is less than or equal to your bid, then you pay.

If the random price so the die comes up one dollar the need only pay one dollar if the random prices more than your bid like four dollars there’s no transaction. Determining the selling price using a random number generator removes any incentive for people to misrepresent their true price.

If you would underbid and said you were only willing to pay one dollar for the apple you’d lose the opportunity to buy the apple for two dollars if you would overbid and said you were willing to pay three dollars you might get stuck paying more than you intended. So behavioral economists use this tool to ensure that people tell the truth.

A common currency to choose

Rangel and its colleagues gave people many choices of this sort snack after snack after snack. They found that a particular brain regions activation tracked how much people are willing to pay for each snack we call the region the medial orbital frontal cortex. To locate this region your brain this touch a finger to your lower for right between her eyebrows your finger would be pointing back toward your brains orbital frontal cortex which refers to the bottom of your frontal lobes just above the orbits of your eyes.

Medial just means the middle of this region along the gap between the two hemispheres of your brain. This area receives input those dopamine neurons that I introduced an earlier lecture. When I say activation in this region tracked willingness to pay, I mean something very simple: the activation was greater for snacks for which people would pay three dollars then for two dollar snacks, greater for snacks for which people would pay two dollars and for one dollar snacks and so on and importantly activation was independent of the specific snacks on which people were bidding.

Two different people might prefer completely different snacks one person loves chocolate the other chips but they would both show increased activation to the specific snacks that they found most valuable. Rangel and others has shown that the activation of the medial orbito-frontal cortex tracks other sorts of willingness to pay such as how much people pay for physical goods like wine or electronics or how much people will pay to avoid eating something unpleasant.

One experiment even show that this regions activation predicted the degree to which someone softly preferences were influenced by brand labels like Coca-Cola versus Pepsi. When someone sees the label of their preferred soft drink while consuming it there’s more activation this region compared to when they do it on a blind taste test. These results are consistent with the idea this brain region the medial orbito-frontal cortex represents a common currency for subjective value, how much something is worth to us regardless of what it is.

Our brains use a common currency to make decisions between different sorts of goods, choosing whether we’d rather keep your money or buy a snack rather spend your money on a television or a vacation.