George Loewenstein
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George Loewenstein is a neuroeconomist at Carnegie Mellon University who has studied everything from the brain activity triggered by retail shopping to the psychology of lottery tickets. Mind Matters editor Jonah Lehrer chats with Loewenstein about his latest research, and what why credit cards are so dangerous.
LEHRER: Your most recent paper looked at some of the factors that seem to influence the purchase of lottery tickets. What did you find?
LOEWENSTEIN: We [Emily Haisley, Romel Mostafa and I, all of whom are researchers at Carnegie Mellon] have two papers addressing the motives underlying lottery ticket purchases. All of the research was conducted with low income samples recruited at the Greyhound bus station in Pittsburgh. In all of the studies, we paid travelers $5 for completing a survey on their attitudes toward Pittsburgh, then give them the opportunity to purchase lottery tickets with the money. The variable of interest was, in all studies, the number of tickets they purchased.
One of the papers, just out in the Journal of Behavioral Decision Making was inspired by the empirical observation that the poor spend a disproportionate percentage of their income on lottery tickets. We conducted two experiments to examine whether making people feel poor makes them want to play the lottery.
We randomly assigned subjects to either feel relatively poor or relatively rich by having them complete demographic questions that included an item on annual income. The group made to feel poor was asked to provide its income on a scale that began at "less than $100,000" and went up from there, ensuring that most respondents would be in the lowest income tier. The group made to feel subjectively wealthier was asked to report income on a scale that began with "less than $10,000" and increased in $10,000 increments, leading most respondents to be in a middle tier. The group made to feel poor purchased twice as many lottery tickets (an average of 1.27) than those made to feel relatively wealthier (0.67 tickets, on average).
In the second experiment, we indirectly reminded participants that, while different income groups face unequal prospects when it comes to education, employment and housing, everyone has an equal chance to win the lottery. This reminder that the lottery is a kind of “social equalizer” also increased lottery tickets purchases. The group given this reminder purchased 1.31 tickets, on average, as compared with 0.54 for those not given such a reminder.
LEHRER: Have these experiments changed how you feel about the lottery? Would you advocate any changes to the way the lottery system is run?
LOEWENSTEIN: Clearly there is a demand for playing the lottery, and people seem to get something out of it; otherwise they wouldn't keep playing. But it is well established that low income people spend a higher percentage of their income on the lottery than other income groups (with one study finding that those earning incomes less than $12,400 spend an average of $645 on lotteries each year), so the lottery ends up taxing the poor at a higher rate when it makes much more sense to tax the rich at a higher rate.
The finding from our first study, that when you make people feel poor they play more, is especially sad since playing the lottery is on average a massively losing proposition. The propensity of low income individuals to play the lottery has the perverse effect of exacerbating their poverty. Although there are no easy solutions to the problem, one obvious one would be to cease marketing and advertising that targets the poor. It probably makes sense for the state to sell lottery tickets, because otherwise they will be sold by organized crime. However, does it really make sense for the state to be inducing, through advertising, poor people to play who wouldn't play in the absence of such inducement?
Similarly, states could promote and offer more games that appeal to wealthier players, such as Powerball, and not those popular with poorer players, such as instant scratch-off tickets. Another obvious solution, though one that is even less likely to be implemented, would be for the state to increase the payout on the tickets, and perhaps to increase the number of moderate size prizes.
Finally, a third option would be for financial institutions to issue investment instruments that have lottery-like qualities (for example, offered in small amounts, available at many convenient points of purchase, provide a small chance of a large upside) but offer a positive rate of return, providing the pleasure of playing the lottery without the steep cost. In many other countries “prize bonds” or other savings instruments are available that pay lottery winnings in place of, or in addition to, regular interest. Regulations in the United States have stymied the development of such offerings.
LEHRER: In a recent paper on the neural mechanisms underlying our purchasing decisions, you speculated that the "abstract nature of credit cards" might "anaesthetize consumers against the pain of paying." How might that occur?
LOEWENSTEIN: Unlike cash, where you are turning something over (bills and coins) as you are receiving something (a good or service), with credit cards you or the store clerk simply swipes the card, which doesn't feel like giving something up. With credit cards it is also easier to miss, or deliberately ignore, how much one is spending. (A 2001 study by Dilip Soman, a professor of marketing at the University of Toronto, suggests that that people are less likely to recall, and more likely to underestimate, how much they spent on a recent transaction when they paid by credit card than with cash.) Worse, with credit cards it is unclear whether or when you are going into debt because there is uncertainty about whether you will be able to pay for your cumulated expenditures at the end of the month. Credit cards allow people to go into debt passively, without explicitly deciding to take on the debt or feeling like they are going into debt. How many credit card users who end up with $10,000 of debt at the end of the year would have been willing, at the beginning of the year, to take out a $10,000 loan to finance those same purchases? Many people who end up massively in debt with credit cards would not have done so if they had had to make an explicit decision to go into debt.
LEHRER: Have these experiments changed the way you make purchasing decisions? Are you more reticent about using credit cards?
LOEWENSTEIN: Fortunately, my income is well above the poverty line and I'm a tightwad to begin with—my problem is not spending money when I shouldn’t, but not spending money when I should. Credit cards are wonderful for affluent tightwads. They are deadly for poor spendthrifts.
LEHRER: You are a leading figure in neuroeconomics, a new field that attempts to merge neuroscience and economics. What do you think are some of the most successful and important findings in the field so far? And what topics do you hope neuroeconomists address in the future?
LOEWENSTEIN: Neuroeconomics is still in its infancy, and many of the existing findings are speculative or contradictory. As of the present, neuroscience has mainly been used to test existing economic, and especially behavioral economic, theories. I am unaware of new, or at least definitive, insights that have emerged from the field so far. I believe that there is a danger that the field has been oversold, and perhaps “over-bought,” leading to inevitable disappointment and disillusionment. People get very excited about any research that includes colorful pictures of the brain “lighting up”—however weak the methods or results might be. However, any progress on the research frontier that links brain activity to complex behaviors, such as economic decisions, is inherently interesting and important. Give us another five to 10 years and there will almost surely be some very exciting developments.
I personally am most excited about existing and in-progress work examining the impact of emotions on economic behavior. So much of what we see in the economy—such as market booms and busts—is clearly driven by emotions. Conventional economics fails to account for the role of emotions and only captures the more rational, calculating side of human behavior. Neuroeconomics research has already begun to enhance our understanding of the role of emotions in economic behavior. Ultimately, I believe, neuroeconomics is going to provide a perspective on human decision that integrates the duality of emotion and deliberation.
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18 Comments
Add CommentThe bald statement that it is more sensible to tax the rich at a higher rate is none scientific. It may seem more ethical or responsible, but is not a given, merely an opinion (or assumption) that detracts from the substance, if any, of this research.
Reply | Report Abuse | Link to thisSecondly, the analysis, supposedly by an 'economist' takes in no account of the utility curve of the monies involved. It may well be that a $5000 payoff, however unlikely, could be such a life-changing event for a person that risking $2 per day represents a valid decision. The same would be true for some of the higher payoff games, where the chance of winning is trivial, but $5 -100 million as a possibility is interesting, at a cost of $1-2 /week.
Finally, I can buy a ticket on Wednesday for a dollar, and amuse myself until late Friday thinking about how to spend it - or I can spend $10 (no popcorn) and enjoy a 2 hour movie.
This imposition of the researcher's values into the experiment reminds me of the story of the minister, the engineer, and the economist stranded with nothing but canned food on as island, with no tools or utensils.
Seeking a way to access the food, ...
"Let us pray" said the minister, with no results.
"Let us build a fire and heat the cans until they burst open" said the engineer. But lacking matches...
"Assume a can opener" said the economist.
There is another option - raise the minimum wage and cap CEO compensation through regulation and/or taxes as suggested by James Galbraith in The Predator State - so that the lowest paid workers can afford to live without gambling away some of their meager earnings on the slim chance they will be the one in 13 million winner. Provide reasonable social services instead of funneling taxes from the middle class to corporations and the super rich through tax cuts and privatization of formerly efficient and effective and inexpensive government programs and services (Fannie Mae used to be a government program before it was privatized and went bankrupt). Social Security could be funded forever by removing the payroll tax cap.
Reply | Report Abuse | Link to thisAnd of course, state run lotteries could have lower pay outs and more favorable odds for players, that would certainly put money into the hands of poor folks who would probably put it right back into the economy.
And thus we see the willingness of people to giving up their freedom for a little security. Cutting out illegal social programs would do a lot more to curb government spending, which is an unmentioned factor in personal spending. The willingness of the US government to spend in deficit has mirrored the citizens willingness to do the same. Socializing our economy by putting legal caps on any persons' salary will be a dampener to all forms of endeavor. Encourage the lazy by giving more handouts in the form of higher minimum wage and you say it will help. Raising the minimum wage merely makes the middle class poorer.
Reply | Report Abuse | Link to thisYou cannot get ahead by stealing from one sector of society to give to another. Affecting the attitude of the poor is a valid method of influencing them for the better, especially in programs which are (supposed) to help fund government spending.
George Loewenstein's comment about busts and booms in the economy being driven by emotions sounds very interesting. I would like to ask him, though, is he referring to emotion in a kind of mass hysteria way (e.g., millions of people had similar emotions right after the 9/11 attacks, when Princess Diana died, etc.) or in terms of individual people? If it is the emotion of the masses, so to speak, how is it different to look at the actual emotions rather than the events that cause those emotions and a whole host of predictable economic outcomes? I know he is talking about this as an upcoming research topic, but is there already neuroeconomic literature out there on the effects of emotions on the economy?
Reply | Report Abuse | Link to thisThe comment about lottery like savings schemes is quite interesting as the United Kingdom has had a such a scheme, Premium Bonds, for over fifty years. When bonds are held for an extended period there is a reasonable expectation of average "winnings" coming out at around market interest rates. Basically it works.
Reply | Report Abuse | Link to thisthere has been a RECENT SURGE IN LOTTERY TICKET PURCHASES and CASINO MONEY invested. I would hazard a guess that says, that more AMERICANS feel that their choices are LIMITED...that they have more chance of winning in the lottery than getting ahead by hard work or being a good citizen. Obviously that's true, the whitehouse bullies and corrupt congress have fooled the AMERICAN people into paying BIG OILs development costs, as they moved all blue collar, technical, customer service, manufacturing, medical laboratory, and surgeries OUT-OF-COUNTRY.... As the AMERICAN MANUFACTURING hits the skids. Used to be a factory job was a ticket out of poverty....there is no single step that will erase poverty now....unless you sign up to get your haid blowen offta.... A little poverty lanuAGE there schlomoes.
Reply | Report Abuse | Link to thisobviously "rational man," has never met an engineer.... Engineering is largely EMPIRICAL, a recording of "what works." Get a job, your opinion won't support you.
Reply | Report Abuse | Link to thisThe problem with lotteries is that they make the real situation of the ticket buyer -ESPECIALLY POOR ONES- less real. I am poor, I don't have much stuff, but....perhaps I am about to win an incredible amount of money. So this present situation feels slightly less real to a degree that is much greater than the liklihood of the person winning. If they do indeed spend part of a few days thinking abuot what they are going to do, this is, in the vast majority of cases mispent mental work.
Reply | Report Abuse | Link to thisThe lottery is like a drug that helps one hallucinate that what is true is not true. Poor lottery buyers are putting their hopes into a passive, rather than constructive, process. There are political implications to this also, given that a rather significant % of the population is seeking redress by spending money and waiting.
I can respect the argument that if the government backs out of lotteries organized crime will move in. But this argument could be used to legalize the full range of drugs out there, protitution and a host of other 'activities'.
playing the Lottery, and using credit cards is a losing proposition for the lower income, I agree, The only value for them might be entertainment, if they spend very little for it.
Reply | Report Abuse | Link to thisIt's true the middle class is disappearing, if it hasn't already. This can only mean a wider gap between the poor and wealthy class. Whatever the case, the market should reward hard work and education, rather than a high school only educated worker with $50k/yr US auto industry/factory work, etc. job and pension! Those opportunities are disappearing and rightfully should. The free market should prevail and politicians should refrain from manipulating the system.
Reply | Report Abuse | Link to thisThere should not even be a minimum wage in my opinion. Supply and demand in the workforce should set wages rather than inflate wages for the uneducated. This country rewards ineptness and laziness with all is social programs and liberal programs, and I'm tired of paying for them!
Reply | Report Abuse | Link to thisThe lottery is a tax on greed and poor math skills.
Reply | Report Abuse | Link to thisLoewenstein's brilliant analysis is marred by the assumption that because lotteries pay back less than 100%, it is welfare-reducing to participate in them. Provided buyers know the probabilities, there is no reason to believe that the personal benefit from playing the lottery is not as real as buying theft insurance, cosmetics, or any other consumer good.
Reply | Report Abuse | Link to thisIf the poor know the odds and they prefer to buy lottery tickets, there are no grounds for interfering with their exercise of economic power by curtailing availability or even advertising directed to them.
Of course, in the small minority of cases in which gambling addiction is involved, proactive intervention is indicated, but this holds at all income levels.
Herbert Gintis
Hard work regardless of education should still be rewarded. Dfwdamon, you sound selfish and elitist.
Reply | Report Abuse | Link to thisIt is apparent to me that the very purpose of these studies is to find out which people are more vulnerable to to taking risks. We are not all created equally in regards to economics. The elitist attitude I've observed from people indicates an ignorance of the issue. The economic situation a person is currently in or was raised with ultimately affects their habits, hope, and depression levels. Brain health, nutritional levels, and societal pressure (very different for the wealthy than for the poor) are a few very real walls in the way of the impoverished.
Reply | Report Abuse | Link to thisWe HAVE to be responsible for ourselves in order to succeed. People living off of governement assistance don't live as well as those whom are "educated" and make even middle income. Don't fool yourselves.
Lottery tickets provide a small amount of hope and entertainment. Personally, I don't buy them but have observed others' viewpoints that lead to it.
Harsh judgement for the poor such as I've read here lacks the empathy that should be more present in our society. Understanding the pressures of the poor and the actual barriers that keep them there could lead us to a healthier society. It's so very important to care. Poor people are just like you, doing the best they can see possible for themselves, given what they. So many poor people think they are trapped.
@dfwdamon: "The free market should prevail and politicians should refrain from manipulating the system."
Reply | Report Abuse | Link to thisIn reality, how do you propose this to work? Do corporations still pay taxes? Are some more heavily taxed? Are some tax-exempt, like oil? Are some subsidized, like agriculture? Are corporations allowed to lobby the government? Do public health regulations (surely we need some) affect the sales of some companies? Do business people go into government or vice-versa, do laws - and we need them! - effect all business the same?
What I am getting at is that the system is already 'manipulated'. Thinking that the economy is pure apart from some governmental manipulation fails to acknowledge the complexity of relationships involved.
The point about over sold and over bought is relevant. What we see many people at both ends do is to find a simplistic way out. e.g: An FMRI to figure which TV spot works better or an EEG to figure if an ad is making an emotional connect. We at finalmile (www.finalmile.in) have been pushing for a lot of experimentation in real life situations to check for efficacy of interventions based on neuroscience. The amount of interpretation and judgment in understanding and populating emotions is quite high. We could bring down trespassing deaths on Mumbai suburban railway tracks using a neuroscience based approach. The proof of science was in results (60% reduction in deaths). However, this process is long drawn and rigorous. However, we as humans are restless and seek instant gratification. There in lies the dilemma.
Reply | Report Abuse | Link to thisobviously "rational man," has never met an engineer.... Engineering is largely EMPIRICAL, a recording of "what works." Get a job, your opinion won't support you.
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