Friday, April 17, 2009

"Greed, Fear and the Brain"

We make decisions differently when we're under stress. I don't think many people would disagree with that. I "visualized" a great talk by Richard Peterson about just how much fear influences our decisions. As we are flooded with dire predictions and heart-rendingly depressing stories, it's important to keep in mind that the decisions that we're making might not be entirely rational.

Peterson explains the science of how our brains work, and which parts of the brain are involved in making decisions. It's not quite as simple as "emotion" vs. "reason". Anxiety and fear live in our limbic system, which is below the level of consciousness. Greed or, really, the anticipation of pleasure, lives in our pleasure centers. What's remarkable is that most of our fear AND our pleasure is about the anticipation of outcomes, not the outcomes themselves. Our pleasure centers go wild while we are making a bet, for example, but they are almost silent when the results of the bet are revealed -- even if we win!

The same is true on the negative side -- our fear is all driven by the anticipation of negative outcomes. Another interesting insight is that normally our fear of loss is much greater than our positive anticipation of gain. Imagine putting a bet on a coin toss. The odds are 50-50, right? Most people have to be offered twice the amount in winnings as they would lose with a negative outcome before they will make a significant wager on a coin toss. So they might turn down a bet where they would win $150, but risk losing $100. Mathematically, it is a great bet to take. Emotionally, the risk of losing the $100 is too much.

So, as you make decisions in this economy, step back to really understand what is driving your decision. Do you have a decision-making process that you use in good times and bad? How do you measure your process? Disciplined decision-making will see you through times of panic and times of exuberance. Understanding how your brain works isn't such a bad idea either.



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