Should people of lower cognitive ability be trained to be more financially patient? Apparently we don’t make financial decisions in as rational a way as we might like to think. Although financial studies can be carried out in situations that perhaps don’t accurately mirror the situations in which we might find ourselves in the real world, when deciding how to spend money, there are a couple of interesting studies out that supposedly shed more light on what happens when our financial decision-making is going on.
One study shows that men with more testosterone are likely to punish others involved in transactions, even at their own financial expense, and the other shows that apparently people with superior cognitive ability take more risks, and are likely to postpone immediate pleasure for greater gains at a later date.
Using the Ultimatum game as a testing ground, it was found that men with higher testosterone levels were more likely to reject low bids, even if it meant that both parties would then lose a cut of the final pool. The game features a budget from which a proposer offers a portion to a responder. If the responder rejects the proposal then both parties lose out.
‘Twenty-six male students played the Ultimatum Game with real money after having their testosterone levels measured by saliva swab over three days. Terence Burnham at Harvard University found the students with higher testosterone levels were more likely to reject a poor offer from the proposer: 45 per cent of the men with above-average testosterone chose to reject a low $5 offer from a budget of $40 compared with 7 per cent of men with below-average testosterone.’
It has been proposed that a reason for rejecting low bids is to build up a reputation for being, well, basically, ‘hard’. A low offer can be seen as an insult to the responder and to repeatedly refuse these offers means that perhaps one then is less likely to receive a low offer in the future, as by rejecting offers, the responder is ‘educating’ the proposer.
In the Proceedings of the Royal Society, Terence Burnham said: ‘If our understanding of Ultimatum Game rejections and other related phenomena can be improved through studies of hormones, morphology, and neurological activity the ramifications for economics might be quite broad and positive.’
In other research, carried out at the University of Bonn and the Institute for the Study of Labour, in Germany, by Thomas Dohmen and colleagues, it was shown that cognitive abilities might be related to financial patience and risk aversion. There is thought to be a relationship between prosperity and high IQ, and this study attempted to tie up these factors.
Just over 1000 German adults were tested, using subscales from the Wechsler Adult Intelligence Scale. David Wechsler, in 1981, wrote: ‘Intelligence is multifaceted as well as multidetermined…What it always calls for is not a particular ability but an overall competency or global capacity” (1981, p. 8).
According to Wechsler, intelligence is influenced by personality traits and other nonintellective components, such as anxiety, persistence and goal awareness. These nonintellective factors are important, according to Wechsler, but he remarks, ”no amount of drive will develop a dullard into a mathematician” (1981, p.8).
On the basis of this rather condemnatory approach to intelligence, half the participants had to then make a series of choices between either a guaranteed lower amount ranging from 10 euros to 190 euros or a 50 per cent chance of winning 300 euros. This then looked at their financial risk aversion. Remaining participants were then tested for their financial patience, choosing between 100 euros today or a series of larger amounts in 12 months time. There was a one in seven chance that participants would receive the outcome of one of their choices.
Armin Falk, from the University of Bonn, says, of the results on financial decision-making: ‘The more intelligent the test subjects were, the more patient and tolerant of risk they were.’ The researchers said that with cognitive ability assumed to be at least partly inherited, these new findings could help explain the intergenerational transmission of poverty and socio-economic status. Whether or not this is the case, I would next like to see research carried out that tests whether these men who rejected low bids would also reject this hypothesis. People talk about ‘being able to afford to take risks.’ I would have thought that that is precisely the point. If you are poor, then you are more dependent on knowing for certain where your next money or meal is coming from, and not gambling it away.
Other research, carried out by Jaideep Bains, PhD, a University of Calgary scientist and his team of researchers at the Hotchkiss Brain Institute has discovered that neurons in the hypothalamus, the brain's centre for stress responses, interpret 'off' chemical signals as 'on' chemical signals when stress is perceived. "It's as if the brakes in your car are now acting to speed up the vehicle, rather than slow it down." says Bains.
Normally, neurons receive different chemical signals that tell them to either switch on or switch off. The off switch, or brake, only works if the levels of chloride ion in the cells are kept at a low level. This is accomplished by the transporter protein KCC2. Stress can lower the activity of this protein, causing the brake, a neurotransmitter called gamma-Aminobutyric acid, not to work properly.
A loss of the brain's ability to slow down could explain why too much (although how much is too much is a question in itself) stress can have such a terrible effect on people's lives.
"There is still much work needed in the basic science of this phenomenon before there are any new advances in the medical treatment of stress," says Bains, while Yves De Koninck, PhD, and president-elect of the Canadian Association for Neuroscience and professor of Psychiatry at Laval University, believes that "This opens entirely new and quite unexpected avenues for controlling stress responses.” This research may go further to helping us understand why financial decision-making may appear to be irrational – if you are under stress then decision-making gets put under enormous pressure, as is possibly shown by these latter findings. All the more reason for trying to go easy on yourself if you are in debt, or feeling depressed and unable to cope. Just say to yourself, ‘Look after your GABAs and the pounds will look after themselves.’
Hewitt SA, Wamsteeker JI, Kurz EU, Bains JS. Altered chloride homeostasis removes synaptic inhibitory constraint of the stress axis. Nat Neurosci. 2009 Mar 1; doi:10.1038/nn.2274
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