How the brain handles uncertainty
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.
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