IMERT Pune - MBA: Neuro Economics: Science or Science Fiction? Jim Heskett

Are you ready for "neuro everything" in management? The year 2007 will see a flood of books and articles describing findings and conclusions drawn from the growing use of MRI (magnetic resonance imaging) devices for studying decision making.

The research follows a pattern. It is based on increasing knowledge that different parts of the brain demonstrate heightened activity when subjected to challenges. Subjects are asked a series of questions (often requiring decisions) while their brains are being scanned (or while they are hooked to lie detectors). The work is being carried out at both European and U.S. universities such as Stanford, George Mason, and Amsterdam.

Among the propositions advanced from this work thus far, for example, are that risk and return are assessed in different parts of the brain, thereby questioning theories regarding expected utility on which a great deal of decision theory has been based up to now. Thus, according to this research, different qualities of, say, investment decisions are made when perceptions of risk or greed (return) prevail in terms of heightened brain activity. Another line of work involves the study of the best locus in the brain, conscious or subconscious, for making various decisions. For example, it is thought that more complex decisions involving hard-to-quantify factors are best made in the subconscious after some amount of preparation. That is, study the problem, sleep on it, and decide without further analysis. It's the type of decision making described by Malcolm Gladwell in his book, Blink. According to this line of thinking, questions involving more quantifiable, straightforward considerations are best answered in the conscious portion of the brain, presumably after considerable conscious thought. Work in neuro marketing at Ludwig-Maximilians University in Munich now claims that strong brands create more excitement in decision-influencing areas of the brain than weak brands, even for mundane products. Does this influence purchase decisions? Stay tuned.

Just how earth-shaking is this? After all, the late Milton Friedman was said to be most proud of his work with Simon Kuznets in which they concluded that people make purchasing decisions based on what they expect their incomes to be in the long-term, thereby mitigating the short-term impact on personal spending of events such as tax legislation. And Warren Buffett is fond of explaining his investment philosophy by saying, "We simply attempt to be fearful when others are greedy and to be greedy when others are fearful."

A lot of this comes down to knowing yourself, with or without the benefit of MRI devices. Are we about to be subject to a number of striking conclusions based on studies involving a small number of brain scans? Will there, as my colleague Luc Wathieu suspects, turn out to be other explanations for findings, for example, that question the value of rational, conscious decision making? What are the more general implications of neuro economics? Will it have strong explanatory as well as manipulative potential for us as consumers, managers, and citizens? Will it bring medical schools, business schools, and economics departments closer together? Or is it so far ahead of its time that we can ignore it for now? What do you think?

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Summing Up

Neuro economics is here to stay, according to a majority of those responding to this month's column. Its promises are too great to ignore. But it may be too early to know whether the promises will be realized in practice. And in the meantime, we stand warned against the hype that will be associated with findings based on research in need of standards and more fully-developed methods. Joseph Mello points out that "these studies will produce results along two lines. First, there will be … conclusions that can impact the 'tools' or processes a person uses to make decisions." At the same time, he adds, there will be "a new set of management and pop psychology books with dubious claims …."

Among the potential benefits making it highly relevant, according to David Skinner, is that "its output might just give us some new clues about why so many of the apparently unshakeable beliefs about change management … turn out not to yield the results we expect." Victoria Pynchon looks forward to the possibility that it will, for example, "give us surprising insight into our inclination to do one another good or ill." Roger Dooley noted that "self-reporting in surveys and focus groups is a limited tool, and I have no doubt that in the future brain scans will augment … traditional research methods."

But for Mark Spellmann, research of the kind associated with neuro economics raises "many interesting questions. One is, how do we interpret research findings when neurological results conflict with self-report? … knowing how the brain is working explains very little about what the mind produces—what we think, what we believe, how we make decisions." As Mike Flanagan puts it, "it might be nice to know that the decision was made on the right side or the left side of the brain. But this will never lead to deciding by a mechanical means, nor in predicting a decision outcome." There was even concern expressed about the efficacy of MRI-based research on human health.

Several suggested that it is hard at this point to assess the impact of this work. Dick Meza said that "it will have to run the gauntlet of peer reviews and further research …." Lorenzo Ferlazzo observed that "the current lack of standardized insights into behavioral stimuli and evolutionary asynchrony across global population types would restrict the validity of findings for some time to come." Biju Dominic offered the opinion that "I strongly believe that fMRI-led research into the brain is a top-down, far-too-simplistic approach …. But a bottom-up approach that gets into understanding the functioning of the brain … will be a slow but surer approach to understanding human behavior."

Others welcomed the possibility that this work may bring together economists, management theorists, and medical researchers. As Shann Turnbull put it, "The time has come for business schools to teach how to design, introduce, and operate network-governed enterprises using the knowledge of neuro economics."

Among questions this leaves us with are whether this research is valuable primarily in the aggregate or in individual cases. If so, just how long will it take for practical results? And will the early "wins" be sufficiently significant to foster longer term development in the field? Is it too early to tell?

HBS Faculty Member James Heskett