This document provides an overview of the field of neuroeconomics. It discusses how neuroeconomics integrates various disciplines like marketing, economics, psychology and neuroscience to study consumer behavior and decision making at the neural level. Some key areas covered are the influence of advertising, emotion and other people on decisions. It also summarizes various neuroscience methods like brain imaging and discusses some findings on how the brain responds to brands and advertising.

1. An Overview of Neuroeconomics Dante Pirouz Doctoral Candidate Researcher Paul Merage School of Business February 7, 2008 Trial 1 T 0 0.5 1 1.5 2 2.5 3 3.5

2. Some Neuroecon Humor…

3. Consumer Behavior: Brand identification Brand recognition Emotional response Memory

4. What is Neuroeconomics? Studies how the brain interacts with the environment to produce economic or consumer behavior Integrates marketing, economics, psychology, neuroscience, and cognitive science Influence of advertising and brands Decision making Influence of emotion, biases, etc. Influence of other people Segments – elderly, children, males, females, etc. Addictive consumption

5. Cognitive Neuroscience Seeks to understand the neural mechanisms underlying higher brain function Language, learning, memory, attention, emotion, decision making, perception

6. Why Combine Consumer Behavior and Neuroscience? Neoclassical economists ask “Given rational people, how do models behave?” Psychologists ask “Why do people behave the way they do?” Looking into the “black box” At the neuronal and biochemical level To understand what makes people happy, risk seeking or averse, trusting or trustworthy and what drives preference and choice

7. Neural Response to Advertising Taste test Coke vs. Pepsi Baylor College of Medicine 2004 Super Bowl ads Ranking by fMRI brain scans UCLA 2006 Winner: ‘I’m Going to Disney World’ Loser: Budweiser’s ‘Secret Fridge’

8. Main Brain Regions Occipital Lobe Frontal Lobe Parietal Lobe Temporal Lobe

9. Pons Spinal Cord Cerebellum Amygdala Thalamus Hypothalamus Hippocampal Formation Corpus Callosum Cingulate Gyrus Striatum Limbic System

10. Neuroscience Methods Studying humans Imaging of brain activity Measuring hormone levels, pupil dilation, galvanic skin response, heart rate variability Lesion studies Stimulation Transcranial magnetic stimulation (TMS) Studying animals Single and multiunit recordings

11. Phineas Gage

12. Brain Imaging Techniques Methodology What is imaged? How? Electroencephalography (EEG) Changes in electrical brain current Electrodes placed on scalp measure electrical brain waves Computed (Axial) Tomography Scan (CT or CAT) X-ray images of the brain Multiple images (tomograms) are taken by rotating X-ray tubes. Does not image function Positron Emission Tomography (PET) Emissions from radioactive chemicals in the blood Radioactive isotopes injected into the blood are detected like X-rays Magnetoencephalography (MEG) Changes in electrical brain current Similar to EEG but magnetic brain waves are measured instead of electrical waves Functional Magnetic Resonance Imaging (fMRI) Blood flow; oxyhemoglobin to deoxyhemoglobin ratio Relies on magnetic properties of blood. Shows brain function spatially and temporally

13. EEG

14. CT/CAT

15. PET

16. MEG

17. Functional Magnetic Resonance Imaging (fMRI) Uses strong magnetic fields to create images of biological tissue Measures hemodynamic signals related to neural activity Blood Oxygenation Level Dependent (BOLD) contrast MR signal of blood is dependent on level of oxygenation Changes in deoxyhemoglobin Blood flow in the brain implies function Studies have shown regional brain activity when exposed to cues (Huettel et al. 2004) Source: UC Irvine Center for Functional Onco-Imaging

18. Why is fMRI so exciting? Non-invasive Better temporal resolution Good and improving spatial resolution Can be used in conjunction with other methods (Savoy 2005) Pirouz & Park, 2005, Harvard Medical School/Massachusetts General Hospital Fellowship Program in fMRI

19. Caveats of fMRI Interpreting the results Direct vs. indirect measure of brain activity Inferring behavior Experimental design Statistical methods Learning the procedure and statistical methods Cost Comfort/safety/cooperation of the subject

20. The Dark Side of Product Attachment: The Neural Response to Addictive Product Cues Dante Pirouz, Doctoral Student Dr. Steve Cramer, Assistant Professor, Neuroanatomy/Neuroscience Connie Pechmann, Professor, Marketing Paul Rodriguez, Research Specialist, Cognitive Science University of California, Irvine Funded by a clinical research grant from UCI’s General Clinical Research Center (GCRC)

21. Background Cue Reactivity Theory (Carter & Tiffany 1999) Substance users exposed to environmental cues (visual, tactile, olfactory, etc.) Role of cues in addiction How this is related to marketing: Role marketing/ advertising plays in influencing behavior Especially for vulnerable populations, e.g. adolescents

22. Method Event-Related fMRI (3T) 6 subjects 14 – 25 years old 2 groups: smokers and non-smokers Stimuli Cigarette ads Non-cigarette ads Matched to cig ads Neutral images

23. Cigarette Ads Ads from 1998 - 2000 40 images Marlboro, Newport, Camel, Winston, Salem, Virginia Slims, Lucky Strike Source: Pollay Tobacco Ad Collection

24. Neutral Ads Ads from 1999 - 2005 Matched in color, theme, etc. 40 images

25. Neutral Images International Affective Picture System (Lang 1997) 40 images

30. Neural Predictors of Purchases Knutson, Rick, Wimmer, Prelec and Loewenstein, Neuron, 2007 Investigates how people process preference and price when buying Decision to purchase Tradeoff between pleasure of acquisition and pain of paying Positive and negative anticipatory affect Determine the distinct neural components of the purchase decision process in individuals

32. Experimental Design Event-related fMRI SHOP = Save Holdings Or Purchase task 26 adults Endowed $20 to spend on range of products 80 products; $8-$80 Subjects purchased about 30% of products

33. Results Nucleus accumbens (NAcc) Anticipation of financial gains Correlated with product preference Evaluating rewards and craving Insula Implicated in anticipation of loss (Paulus & Stein 2006) Correlated with excessive prices Mesial prefrontal cortex (MPFC) Implicated with integrating gains and losses Correlated with reduced prices

34. Results Study shows some evidence of regions that can predict purchasing Preference elicits activation in NAcc prior to purchase decision Excessive prices elicits insula activation and MPFC deactivation Preference as potential gain and price as potential cost

36. Investment Behavior and the Negative Side of Emotion Shiv, Loewenstein, Bechara, Damasio, and Damasio, Psychological Science, 2005 Do emotions cause poor investment decisions? Compared subjects with stable focal brain lesions disabling emotional regions with control patients with no impairment 19 normal subjects, 15 lesion patients with damage in emotional regions, 7 lesion controls with damage in non-emotion related regions

37. Investment Game Participants told they would making several rounds of investment decisions Endowed with $20 play money Choose between 2 options: invest or don’t invest If invest, give $1 to researcher; if not, keep $1 Researcher will flip coin If heads, then lose $1 If tails, then get $2.50 Rational choice: Always invest!! EV of investing is higher than not investing

38. Results Lesion patients with emotional neural damage make more advantageous investment decisions than normal subjects Target patients invested consistently across rounds; controls/normal subjects increasingly declined to invest

39. The Neurobiology of Trust Zak, Kurzban & Matzner, Annals of New York Academy of Science, 2004 Do hormones, such as oxytocin, regulate trust behavior? Oxytocin Neuropeptide involved in social recognition and bonding Trust game Subjects arranged into DM1-DM2 dyads DM1 asked to split $10 Decision will determine how much they earn 28 mL of blood drawn after each decision 2 conditions: Intention and random draw

40. Trust Game At node A, the investor has the option of either path Moving left ends the game with the outcomes: $0 to the Trustee and $10 to the Investor Moving right allows trustee to move (after investment is increased) Trustee can choose either path at node B Once trustee moves the game ends and payoffs are distributed (McCabe 2003a) A: Investor B: Trustee $0 $10 $15 $15 $0 $30

41. Results Oxytocin (OT) levels were higher (2x) with an intentional trust signal from DM1s in DM2s than in random draw condition Also, behavior changed with an intentional trust signal DM2s returned 53% of the money they received vs. 18% in the random draw condition

43. $20/bottle $90/bottle

44. Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness Plassman, O’Doherty, Shiv and Rangel, PNAC, 2008 Do the changes in the price of a product affect neural representations of experienced pleasantness = price/quality effect Subjects were scanned while taste testing red wines that they believed were different and sold at different prices

46. Results Increasing the price of a wine increased subjective reports of flavor pleasantness Increased BOLD activity in the medial orbitofrontal cortex, believed to encode for experienced pleasantness Study shows that marketing actions modulate neural correlates of experienced pleasantness

47. Criticisms Theory? Preference for existing models Press coverage Consumer concern Commercial ventures

48. Recommended Reading “ Neuroeconomics: How Neuroscience Can Inform Economics” Colin F. Camerer, George Loewenstein, and Drazen Prelec (2005) Journal of Economic Literature 43(1): 9. “ What Can Advertisers Learn from Neuroscience?” Hilke Plassmann, Tim Ambler, Sven Braeutigam, and Peter Kenning (2007) International Journal of Advertising 26(2): 151-75. The Secret Life of the Brain , PBS

49. Thanks! [email_address] http://www.merage.uci.edu/~dpirouz04/