A neuro-economist explains the latte dilemma: Are you really gonna pay $4 for coffee?

September 26, 2011

By Dan Weissmann and LaCreshia Birts

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(Photo compilation/Dan Weissmann)

We keep hearing that the health of the economy is all tied up with how comfortable we are in parting with our cash. But how do consumers make their decisions about what to buy-- for instance, whether they can afford a $4 cup of coffee? The answer, according to a neuro-scientist we tracked down, happens deep in our lizard brain. 

Consider this observation (bet it sounds familiar):  “Starbucks recently raised their prices, and so I got to the point where I thought, 'This is insane. I can’t believe I’m spending $4.30 for sixteen ounces of milk and coffee. That’s crazy!'"

In this case, the person making it is my colleague, Ashley Gross.  “And I’m thinking, I don’t know if I can afford this,” Ashley says. “We’re trying to save money in lots of different ways. We’re feeling kind of strapped.  And so every time, I’m kind of walking there thinking, ‘OK, is this really worth it?’”

And then, it happens:  “I just go for it. I can’t explain it,” she says.  “I feel bad about it. I’m always feeling bad about it.” 

Ashley feels bad, but we’re often told that what she’s doing—spending money—is exactly how we’re supposed to get the economy going again.  When consumer spending numbers come out later this week, economists will look to them as an indicator of whether things are getting better. 

But look how complicated an individual consumer-spending decision can be—Ashley can’t explain why she chooses to go for it and plunk down $4.30 for a latte.

So it turns out there are people who study exactly this:  What’s going on inside Ashley’s brain at that moment? They’re called neuro-economists.  They put test subjects inside magnetic-resonance imaging machines, give them some decisions to make, and watch the fireworks go off in their brains.  Since they’re economists, a lot of them look at more elevated financial decision-making:  Would you like to buy this risky stock, or that safe, low-yield bond? 

But there’s this study that seemed to model Ashley’s latte dilenmma most closely, led by Brian Knutson, a psychology and neuroscience professor at Stanford University.  Knutson designed an experiment to measure what happened in the brain when people had to decide whether or not to buy something. 

Here’s how it worked: 

First, he gave test subjects $20—actually handed them a twenty.  Then he put them inside the magnet and showed them a lot of things they could spend it on—like a box of Godiva chocolates.

And each decision was slowed down enough so that Knutson could watch what was happening in the subject’s brain: 

Here’s a picture of a box of chocolates.  (Now we wait four seconds to see how you respond.) 

Now, here’s the price:  $7.  (We wait four seconds for that to sink in.) 

Now: Do you want it? 

And what he found was, he could tell whether you were going to buy or not just by seeing how your brain responded to seeing the thing and then seeing the price.  He didn’t have to look at what was happening while you were actually deciding. What mattered most was how two very primitive areas of your brain responded to seeing the thing and the price.

First, there’s the part of your brain that says, “Mmm, chocolate.”  (Or, “Mmm, latte.”) It’s called the nucleus accumbens.

“It’s way down deep in your brain, way down deep” says Knutson. “Lizards have it, cats have it.  Activity in this area has been associated in research with anticipating good things in animals.  Food, water, sex, and so forth.”

Number two is the part of your brain that goes “Whoa—seven bucks?”  It’s called the anterior insula.  And whichever lights up the brightest—the “Gimme that!” nucleus accumbens or the “Yikes that’s gonna hurt!” anterior insula—tends to get its way.

“Some people, when they see the latte, their nucleus accumbens would go gangbusters,” Knutson says, “like mine probably would.  Others, not so much of a response.  And those people who have a big nucleus accumbens response, they’re more likely to buy it.”

But again, if you have that anterior insula going, “WHOA, stop!” then you’re more likely to pass.

There is a third part of the brain that comes into play—the one that measures how much you want something against how much it costs.  This was what lit up during the decision-making interval.  It’s called the prefrontal cortex.

“We got a metric that economists call consumer surplus, but I like to call it bargain-versus-ripoff,” Kunutson says. “And there was an area of the prefrontal cortex that seemed very responsive to this bargain-versus-ripoff metric.  When it was a bargain, it went up and when it was a ripoff, it went down.” 

But by the time the prefrontal cortex got involved, the two lower-level regions had already determined which way the decision would go.  Knutson could predict who was going to say “buy that” just based on how their “Gimme-that!” lizard brain and their “Oh-no!” anterior insula responded.

Knutson’s work amounts to a critique of classical economic theory. Traditionally, economists have taken it as a given that people make decisions based on a rational evaluation of the costs and benefits, weighing them like a calculator.

But Knutson’s work shows that it’s these more basic, pre-rational parts of the brain that get activated when we’re making financial decisions.  The prefrontal cortex, which is more of a rational part of your brain, seems like the least powerful and influential player.

And the parts of the brain that actually make calculations don’t really get involved. 

Which leads me to think that if we’re going to spend our way out of trouble—if that’s even a good idea—we’re just going to have to find a lot more things that our inner lizard can not resist. 

Now, I can’t leave anyone thinking that Ashley is the only addict.  So for this week’s windy indicator, WBEZ’s LaCreshia Birts talked to some customers outside a Starbucks in Wicker Park.  Here’s what they said about why they were there.

WOMAN 1:  I rarely, rarely come to Starbucks.  I just woke up late this morning.

MAN 1:  Well, it’s a lot of money for coffee—I could make it cheaper at home.  But you’ve gotta treat yourself to something—you know?—the way everything is.

WOMAN 2:  Of course I feel like a sucker, spending that money, if I could just make it at home.  My excuse is usually that I’m running late for work and I don’t have the time to make it at home. So I would spend the five dollars.

WOMAN 3:  Every day, every morning I’m here. I know.

MAN 2:  I guess I would consider coffee one of those things that would be the last to go. I’m very careful about how I spend money on food.  The sort of extra things have all had to wait.”