In a paper to be reported in the June 13 issue of Science, Princeton psychologists used brain-imaging technology to study people as they made decisions that caused them needlessly to lose money and found that negative emotional states can override logical thinking. The study supports a growing area of research called behavioral economics, which departs from conventional theory by considering psychological factors other than pure logic in individual decision-making.
"It is a very important study," said Princeton psychologist Daniel Kahneman, who won the 2002 Nobel Prize in economics for research blending psychology and economics and who is not an author of the study. "It indicates the tremendous promise of this kind of work for behavioral economics and, ultimately, for economics in general."
The study focused on an example of decision-making called the ultimatum game, in which two strangers meet and have a chance to split $10. One person is designated the "proposer" and offers some portion of the money to the "receiver." If the receiver accepts the offer, both collect the money as proposed; if the receiver rejects the offer, neither receive anything. The game is played with the explicit stipulation that it is a one-time interaction.
Standard economic theory suggests that the proposer should always offer $1 or some minimal amount and that the receiver should always accept, preferring to receive $1 than nothing. Many previous studies, however, have shown that people often reject what they see as unfair offers, foregoing profit and denying a windfall for the other player.