Neuroscientific Foundations for Price Elasticity of Demand (and Psychiatric Interventions for Financial Behaviour Problems)

Textbook expositions on the basics of microeconomic theory rely on assumptions about psychological motivation when explaining consumer behaviour. New research from Stanford University (published this month in the journal Neuron) points towards the possibility of neuroscientific foundations for all microeconomic theory, which would put economics on the road to being a much "harder" science. This month's discovery provides evidence on neural responses to price stimuli which means that we may soon have neuroscientific foundations for the theory on price elasticity of demand. Why don't we try to be the first to do this? And to write the new microeconomics textbooks aswell!

The Stanford research (for more details, see here) scanned consumers as they looked at desirable goods and their prices, and recorded the associated neural activity. (The experiment used an MRI scanner set up to detect brain activity). If the consumer wanted the product, a part of the brain called the nucleus accumbens lit up. Then, when the price appeared, a high price activated our old friend, the insula, which seems to suggest that high prices result in consumer "product" craving, perhaps after the consumer has decided that the pleasure of acquisition was not worth the pain of paying for the product. If we set up an experiment where we could determine the position of insular activation on the price schedule for a particular product, then we would have evidence for the psychological motivation that drives observed patterns of consumer behaviour.

The Stanford researchers say that their study could reveal how credit cards 'trick' the brain into buying more. They wrote: "This finding has implications for understanding behavioural anomalies, such as consumers' growing tendency to overspend and under save when purchasing with credit cards rather than cash." One line of enquiry might be to examine the relationship between borrowing behaviour and the activation of the insula in the brain. This offers some potential for new insights in behavioural finance interventions, but as Kevin has said, there are some ethical issues associated with deliberate insula damage. However, this practice does exist; its referred to as "functional neurosurgery".

A more realistic (psychiatric) intervention for financial behaviour problems can be suggested on the basis of results from another recent study in Stanford University, published in the Journal of Clinical Psychiatry. For more details, see here. These researchers provide evidence which shows that the anti-depressant citalopram, available as Cipramil, reduces compulsive shopping tendencies in those affected by the disorder. Citalopram belongs to a class of drugs called selective serotonin reuptake inhibitors (SSRIs). Further research is to be carried out by the Stanford team. Perhaps we should see if they would be interested in assessing the effect of SSRIs on compulsive borrowing behaviour?