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Risky behaviors such as smoking, alcohol and drug use, speeding or frequently changing sexual partners have significant economic consequences. In the U.S. alone, the annual cost is estimated at 600 billion dollars. In order to define measures that could reduce these costs we need a better understanding of the basis and mechanisms of risk-taking.
To shed some light on risky behavior, an international research team led by the Zurich Center for Neuroeconomics conducted a multi-stage research project. In a first step, they investigated which genetic characteristics correlate with risk-taking behavior. Based on this, the researchers made predictions about risk-taking in a separate sample and investigated whether brains of individuals with a genetic disposition for risk-taking differed from the brains of more risk-averse individuals. Anatomical and functional differences emerged between the brains of these groups of individuals.
Different brain areas involved
The following brain areas showed specific characteristics: The hypothalamus, which releases hormones for the body's vegetative functions; the hippocampus, which is central to remembering; the dorsolateral prefrontal cortex, which is active in self-control and cognitive deliberation; the amygdala, which controls emotional responses to danger; and the ventral striatum, which is active in reward processing.
The study broke new ground in several areas, as it is the first study to examine the basis of risky behavior using a representative sample of 25,000 individuals and to examine the influencing factors - genetic predisposition and differences in the anatomy and function of brain areas - in combination.
Turn off the TV at 11 pm or give in to the cliffhanger and watch just one more episode of your current favorite show? When we think of self-control, we usually mean impulse control and emotion regulation. These processes take place in the prefrontal cortex - the brain area where long-term goals and consequences of actions are processed. However, the ability to overcome one's own selfishness is equally important, as researchers at the Zurich Center for Neuroeconomics have discovered.
To overcome one's own self-centeredness, a person must be able to put themselves into someone else’s situation. This happens in the area in the brain called the temporo-parietal junction. This area is also active in other situations that require self-control, even when no other person is directly involved, such as patience.
The future self is another person
In their studies, the researchers had people choose between an immediate smaller reward and a delayed larger reward (intertemporal decision) and between a selfish reward and a prosocial reward (interpersonal decision). Neurological activity showed that the same brain mechanisms are active in intertemporal and interpersonal decision making.
This research is the first to capture the connection between the neurological mechanisms of patience, self-control, and egocentricity. From a neurological point of view, the brain considers one's future self as another person. Therefore, in a situation requiring patience for a future gain, the same mechanisms are active as in a situation requiring prosocial behavior toward others.
Neuroeconomists, psychologists, and physicians at the University of Zurich show that increased sensitivity in a specific region of the brain contributes to the development of anxiety and depression in response to real-life stress. Their study establishes an objective neurobiological measure for stress resilience in humans.
While stress resilience is a widely discussed concept, it is still very challenging to predict people’s individual response to increased levels of stress. Lab experiments can only go so far in replicating the ongoing and intense stress many people experience in their day-to-day lives. However, a team of researchers from the Zurich Center for Neuroeconomics, together with psychologists and medical researchers at UZH observed a group of medical students who were all about to face real-life stress for an extended period during their six-month internship in the emergency room.
Stress as a response to cognitive conflict and loss of control
Before starting their internship participants were given a task that required them to process conflicting emotional information. This conflict task activates the locus coeruleus-norepinephrine (LC-NE) system, a region of the brain associated with regulating our response to stress and resolving conflict. However, the intensity – often referred to as the “firing rate” – of LC-NE activation varies from one person to the next.
Participants with a higher LC-NE responsivity showed more symptoms of anxiety and depression following their emergency room internships. Thus, the scientists identified an objective neurobiological measure that can predict a person’s stress response. “The more responsive the LC-NE system, the more likely a person will develop symptoms of anxiety and depression when they’re exposed to stress,” Marcus Grüschow summarizes their findings.
This is the first demonstration that in humans, differences in LC-NE responsivity can be used as an indicator for stress resilience. “There might be an even more accessible indicator for stress resilience,” Christian Ruff says. Research with animals suggests that stimulation of the LC-NE system correlates with pupil dilation. “If we could establish the same causal link between pupil dilation and the LC-NE system in humans, it would open up another avenue,” he adds.
During the Great Recession of 2008-09, global GDP declined by about -0.6% (-3.2% in advanced economies). The decline in global GDP due to the Covid-19 recession in 2020 is estimated to be significantly higher at -3.5% (-4.9% in advanced economies)[1]. Remarkably, while merchandise trade fell by around -11% in 2008-09 and took three years to recover, trade volumes dropped by -9.2% in 2020[2] and recovered in less than three months. Mathilde Le Moigne and Ralph Ossa argue that the pandemic led to a recession in which non-tradable services suffer but tradable goods thrived, thus buffering the effect of the recession on global trade volumes.
At the onset of the pandemic, the supply of traded goods was interrupted by lockdowns and plants closures, while the demand for traded goods plummeted due to income uncertainty, rising unemployment, and social distancing. Trade costs skyrocketed due to export restrictions, grounded planes, and closed borders. Hence, the pandemic had an adverse effect on all major determinants of global trade, which explains its initial collapse. As export restrictions were lifted in April 2020 and transportation costs were reduced by record-low fuel prices, global demand for tradable goods rebounded while the demand for non-tradable services remained low.
This explains the decoupling of global trade and GDP dynamics and the surprising resilience of global trade. Trade and GDP dynamics can decouple because GDP has many non-tradable components. For example, non-tradable goods and services represent 65% of U.S. GDP. The shift in consumer expenditure away from predominantly non-traded in-person services (restaurants, hair salons, or cleaning services) towards predominantly traded consumer durables (computers, furniture, and other home appliances) and investment goods (machinery, electronic equipment) supported demand for trade.
An open question is whether this demand for trade is sustainable. Large parts of the economy are currently on “life support”, with government programs and business owners covering huge losses to keep business afloat. Without a comprehensive recovery, these parts of the economy will eventually collapse with uncertain implications for global trade.
Surveys are a central instrument of economic and social science research. However, analyzing the resulting data is not always easy: if life satisfaction is measured on a scale of 1 to 5, a person in category 4 is not "twice as happy" as a person in category 2. Also, the very popular comparison on life satisfaction between population groups is tricky. Even if respondents in group A assign themselves to the higher categories more often than respondents in group B, the statement "Group A is happier" can only be made if all persons within a category are about equally happy. This is rather unlikely: happy, very happy, bursting with happiness – all these levels of happiness end up in category 5. A few years ago, researchers pointed out the problematic nature of these assumptions and questioned a number of findings based on them.
Nick Netzer and alumnus Shuo Liu show how the problematic issues can be remedied by integrating response times into the analysis:
The “chronometric effect” states that we answer questions we find easy very quickly. If you include response times to the answers within a category, a much more heterogeneous picture of a group emerges. A fast response is given more weight, since – in the example above – it points to a happier person. Response times are more decisive for the outer categories than those in the middle. By integrating response times into the analysis, it is possible to make very accurate statements about subjective satisfaction using only two categories.
The researchers also checked how their results relate to results from conventional methods. In the case of surveys on happiness and life satisfaction, the results are largely consistent with the findings using conventional methods. On the other hand, there seems to be greater potential in the study of political orientations. The results indicate that the integration of response times in this area could lead to a considerable improvement in predictions.
Social preferences have been put forward as a potential explanation for a range of selfless behaviors ranging from cooperating with strangers to donating blood. Although the idea of our behavior being governed by altruistic motives is increasingly acknowledged in modern economic thinking, the empirical evidence on the prevalence of social preferences in the general population, and their relevance for everyday behavior remains relatively scarce.
In a recent research project, Thomas Epper, Ernst Fehr and Julien Senn assess the prevalence of social preferences in a sample of the Swiss population, and investigate their relevance for explaining political support for redistributive policies. They use experimental methods and surveys to elicit respondents’ social preferences and link these preferences with respondents’ support for four concrete redistributive proposals that were put to vote in recent years: capping the salary of CEOs, increasing taxes for high-income individuals, introducing a minimum wage, and introducing a universal basic income.
Inequality aversion and overall welfare
The researchers found that a substantial share of the individuals care about others, i.e. that social preferences are also prevalent in the general population. However, these social preferences come in different manifestations. In their sample, around half of the individuals are genuinely averse to inequality: they are willing to reduce inequality in almost every situation, even if doing so reduces the total economic output. One third of their sample displays a different form of social preferences: they are willing to reduce inequality, but not at the expense of economic output. The remaining individuals mostly care about themselves and show very little concern for others, i.e. they correspond to the (stereo)typical selfish individual.
Implications for the design of political initiatives
They then show that social preferences play a key role in explaining political support for redistribution. Voters with social preferences are significantly more likely to support political proposals aimed at reducing inequality, in particular amongst the more affluent individuals. They also provide evidence that policies which primarily aim at reducing the income of the well-off receive support from different individuals than proposals primarily aiming at helping those who are worse off.
On a more general level, their research provides a new piece of evidence that social preferences are prevalent in the general population, and that they are predictive of individual behavior in the real world. Thus, this study makes the case for the external validity of simple measures of inequality aversion elicited via simple experimental techniques.
