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Posted at 5:25 PM ET, 12/28/2010

How the brain handles uncertainty

By Ezra Klein

Jonah Lehrer turns to neuroscience to explain why uncertainty is so bad for the economy:

Camerer’s experiment revolved around a decision making game known as the Ellsberg paradox. Camerer imaged the brains of subjects while they placed bets on whether the next card drawn from a deck of twenty cards would be red or black. At first, the players were told how many red cards and black cards were in the deck, so that they could calculate the probability of the next card being a certain color. The next gamble was trickier: subjects were only told the total number of cards in the deck. They had no idea how many red or black cards the deck contained.

The first gamble corresponds to the hypothetical ideal: investors face a set of known risks, and are able to make a decision based upon a few simple mathematical calculations. We know what we don’t know, and can easily compensate for our uncertainty. As expected, this wager led to increased activity in the parts of the brain (like the striatum) involved with the expectation of rewards, as subjects computed the odds and calculated their expected earnings. Unfortunately, this isn’t how the real world works. In reality, our gambles are clouded by ignorance and ambiguity; we know something about what might happen, but not very much.

When Camerer played this more realistic gambling game, the subjects’ brains reacted very differently. With less information to go on, the players exhibited substantially more activity in the amygdala, a brain area reliably associated with fear conditioning. In other words, we filled in the gaps of our knowledge with fear. And it’s this inexplicable fright – an irrational by-product of not knowing – that keeps us from focusing on the possibility of future rewards.

By Ezra Klein  | December 28, 2010; 5:25 PM ET
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What part of this was irrational? People should hesitate when they don't know the odds. This seems like one of those Robert H Frank deals (as in his book, "Passions Within Reason: The Strategic Role of Emotions"), where emotions are an effective cognitive shortcut.

In the current discourse "uncertainty" a right-wing frame. It means "suck up to the rich or you'll all lose your jobs."

Posted by: chrismealy | December 28, 2010 6:28 PM | Report abuse

Are you implying that government has a central role in reducing uncertainty in the economy? We do expect government to reduce uncertainty in our lives in terms of safety and security in broad terms. But I don't want government applying that idea to the market when corporations lobby for deregulation. Let's be clear about the difference between regulatory uncertainty and competitive uncertainty. And we should be very wary of those who continue to conflate them.

Markets mediate the uncertainty of survival and governments mediate the uncertainty of markets. The uncertainties of competition in the market motivates individuals to create efficiencies and innovations in order to enjoy the greater certainties of wealth. Government regulates the market to insure competition where it works to create opportunities and replaces the market where it restricts opportunities and exploits inequalities.

So the uncertainty of competition is both the bull that drives the economy and the bear that everyone seeks shelter from. Government has to both enable and disable the uncertainty of competition for the greater good.

Malcolm Gladwell makes the case that entrepreneurs don't take greater risks in the face of uncertainty, they just have a sense of sniffing out undiscovered certainties.

Market uncertainty doesn't constrain the economy but government regulations that reduce uncertainty by indirectly restricting competition would. Makes me wonder if that is why the economy has consistently performed better under Democratic administrations.

Posted by: BobFred | December 28, 2010 6:44 PM | Report abuse

i have been doing my own survey....i have asked about two random hundred people, if they think the economy is getting better.
almost unequivocally, they say, "yes, things are getting a little better."
i think that most of these people are working people...clerks in stores, real estate agents, mechanics fixing cars, friends..people that i run into, during the course of a week.
.they are not (experts on the economy,) but they are experts on their own economy, and they feel that there is an improvement.

i find people to be more optimistic than last year.

Posted by: jkaren | December 28, 2010 6:55 PM | Report abuse

Ezra, your introduction to this quote makes it sound as if you are buying into the rightwing/bankster argument that the economy is failing to recover more quickly because President Obama did something to the ecnonomy to create "uncertainty." What uncertainty are you referring to?

Posted by: randrewm | December 28, 2010 7:02 PM | Report abuse

Pseduo-science. Your amygdala lighting up on MRI is about seven steps from "we filled in the gaps of our knowledge with fear." This makes a fun story for a Malcolm Gladwell chapter, but has nothing to do with science.

You made the conclusion you were going to make anyway. The experiment just provided you with a paragraph to put in between, and make it seem more credible.

Posted by: CarlosXL | December 28, 2010 7:51 PM | Report abuse

"And it’s this inexplicable fright – an irrational by-product of not knowing – that keeps us from focusing on the possibility of future rewards."

It's not irrational! Getting financially wiped out is no fun. Why not scale back risk taking. Things are always unknown- it's the experience of risk that makes us more cautious. Think about people you know that lived through a depression or war- they tend to save more than people that haven't.

In addition, the structural problems have not been addressed. Our stupid government is still buying home loans that are less than 5% down. Foreclosures have not gone through to ensure we have hit market bottom on housing. Wages between here and other competing countries are still not matching up. We still have shown absolutely no maturity in dealing with the necessary cuts to medicare, medicaid, social security and defense. We passed a financial reform bill that doesn't fix the moral hazard problems that drive big banking.

It's not uncertainty on my behalf, it's certainty that we're still screwed up!

Posted by: staticvars | December 28, 2010 10:48 PM | Report abuse

Please don't spread crap like that. Two points:

1. The brain is extraordinarily complex and most functions are spread across a number of regions.

2. Corollary: equating the amygdala with "fear" is inaccurate. It participates in a variety of brain functions, and in turn it is not uniquely associated with any one function.

So the conclusions of this argument are, in my opinion, specious.

Let's look at alternatives.

The amygdala is NOT the "fear center." What is does is mediate emotional learning. It is deeply involved in the formation, access, and modification of memories of emotional states and circumstances. One possibility, then, is certainly that memories of fearful situations are being recalled. But another, equally likely, explanation is that the average investment banker is remembering the exhilarating times in the past when he beat expectations in similar circumstances, when he played his hunches, when he gambled and won.

Among other things, the amygdala signals the hypothalamus to initiate activity in the sympathetic nervous system, a response that many people find invigorating. Just ask any skydiver or roller coaster rider.

In addition, the amygdala are involved in memory consolidation. That is, they are critical in the process of transferring information from short term to long term memory. So another potential explanation is that the brain is saying "I'd better remember what is going on right now in case it turns out to be important."

Yeah, the amygdala are reliably associated with fear learning. They're also reliably associated with several processes that have nothing to do with fear and present equally plausible scenarios.

It just isn't possible to draw a bright line from fundamental neurology to behavior at the present time, and what you are retailing here is nothing more than a "Just So" story.

Posted by: pj_camp | December 28, 2010 11:23 PM | Report abuse

This excerpt above is exemplar of some of the worst science news reporting: a weak experimental design and a huge amount of speculation.

#1. They compared two extremes, one with perfect information, another with no information. Knowing the number of cards in the deck tells you nothing about the probability of the result. Yet they try to draw a nuanced conclusion about "the real world" our current situation exists at neither extreme, yet even though our intuitions suggest a spectrum, it would be assumption not a result to claim that this spectrum has biological basis.

#2. Our model of brain is not nearly advanced enough to draw the sorts of conclusions that were drawn. We don't even understand how conscious thought works. Seeing activity in some area of a brain could mean anything. And our understanding of what the amagydala even does comes from only the roughest of correlations.

Posted by: zosima | December 29, 2010 3:04 AM | Report abuse

"inexplicable fright – an irrational by-product of not knowing" Why would anyone consider uncertainty 'irrational'? In comparison, I would say that the most RATIONAL response to uncetainty is to close within oneself - to hoard money, food, buy a gun and hunker down.
Strangely enough the lack of spending, bulk purchases of non-perishable goods and the sales of guns and ammunition would seem to prove me out.

Posted by: IQ168 | December 29, 2010 8:01 AM | Report abuse

The experiment, despite its flaws, makes sense. I don't think it speaks to the conservative mantra about "uncertainty" now because the results have no bearing on the level of uncertainty existing right now in our economy.

Where I think the terrible part is in how this kind of psychology is framed is that the focus is always on the wealthy investors. The Right always wants to coddle these people into the best state for decision-making... but the same psychology applies to the poor, who often have more uncertainties even for relatively small decisions and risks that most would agree are necessary to pull them out of poverty.

I think looking at this- the fact that our psychology is fundamentally similar whether rich or poor, but that we focus on the classes in radically different ways- just goes to show how elitist and somewhat misanthropic modern conservatism is.
On the other hand, the gut reaction of some on the left to attack this study because it seems to (keyword: seems) back up conservative talking points rather than see the opportunity to undermine right-wing thinking, reaffirms a lot of the studies on the psychology of politics.

Posted by: RCBII | December 29, 2010 8:10 AM | Report abuse

That Ezra speaks with confidence absent meaningful knowledge is nothing more than proof he is guided by emotion and attitude. Despite being an intelligent person, he is simply a useful idiot, as his understanding of the experiment proves.

With some knowledge of mathematical probabilities, people are more willing to choose red or black simply because with knowledge of the percentage of cards that are one color or the other helps predict probability. If one has no idea which card colors are predominant, making a "choice" is simply gambling, like betting on the flip of a coin.

Why does Ezra get paid for the nonsense he writes?

Posted by: buggerianpaisley1 | December 29, 2010 12:31 PM | Report abuse

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