PRESTOPUNDIT -- "An intense brain-buzz, guaranteed" (2blowhards)

Brian Knutson, of Stanford University, carried out one recent brain-scan experiment to understand how humans compute such things. Subjects were asked to perform a task, in this case pressing a button during a short interval in which a certain shape was flashed on to a screen. In some trials, the subjects could win up to $5 if successful, while in others they would have to defend against a $5 loss. Before presenting the target, the researchers signalled to subjects which kind of trial they were in.

Brain activity in certain neural systems seemed to reveal a strong correlation with the amount of money at stake. Moreover, the prospects of gains and losses activated different parts of the brain. Traditional economists had long thought�or assumed�that the prospect of a $1,000 gain could compensate you for an equally likely loss of the same size. In subsequent trials, subjects were given another signal: one that provided an estimate of the odds of success. That allowed the researchers to identify the regions of the brain used for recognising an amount of money and for estimating the probability of winning (or losing) it. Having identified these regions, the hope is that future work can measure how the brain performs in situations such as share selection, gambling or deciding to participate in a pension scheme.

David Laibson, an economist at Harvard University, thinks that such experiments underscore the big role that expectations play in a person's well-being. Economists have usually assumed that people's well-being, or �utility�, depends on their level of consumption, but it might be that changes in consumption, especially unexpected downward ones, as in these experiments, can be especially unpleasant.

Mr Laibson's own work tries to solve a different riddle: why people seem to apply vastly different discount rates to immediate and short-term rewards compared with rewards occurring well into the future. People tend much to prefer, say, $100 now to $115 next week, but they are indifferent between $100 a year from now and $115 in a year and a week. In one recent experiment, noted in our science section on October 30th, Mr Laibson and others found that the brain's response to short-term riches (in this case, gift certificates of $15 or $20) occurs largely in the limbic system, a region that governs emotion. By contrast, the prospect of rewards farther into the future triggers the prefrontal cortex, which is often associated with reason and calculation. Thus, choosing immediate economic gratification, by spending excessively on credit cards or not saving enough even though you �know better�, could be a sign that the limbic system is in charge. Government policies, such as forced savings or �cooling off� periods for buying property or cars, may be one remedy.