NEW YORK (MONEY Magazine) - The hot emotions triggered by the amygdala, your brain's panic center, can be harmful when they make you do things you shouldn't. But they can be beneficial, too -- as I learned in April, when I participated in an experiment at the University of Iowa.
First I was wired up with roughly a dozen electrodes and other monitoring gizmos -- on my chest, my palms, my face -- to track my breathing, heartbeat and perspiration. Then I played a computer game designed by neurologist Antoine Bechara. Starting with $2,000 in play money, I clicked a mouse to select a card from one of four decks on the monitor of a Dell PC. Each "draw" made me either "richer" or "poorer." I soon learned that the two left decks were more likely to produce big gains and even bigger losses, while the two right-hand decks combined smaller, more frequent gains with a lower chance of big losses. Gradually, I began picking all my cards from the right.
After the experiment, I looked over the printout of my bodily responses: At first, my skin would sweat, my breath quicken, my heart race and my facial muscles furrow immediately after I clicked on any card that cost me money. When I drew one card that lost me more than $1,100, my pulse shot from 75 to 140 in a split second. After I had suffered three or four bad losses from the riskier decks, my bodily responses surged whenever I even considered selecting a card from one of those two piles. In a matter of minutes, my amygdala had already created an emotional memory that made my body tingle with apprehension at the very thought of taking a big risk -- even with play money.
Ironically, then, this highly "emotional" part of our brain can help make us more rational. Bechara's experiments show that people with damaged amygdalas never learn to avoid picking from the riskier decks. Since their amygdalas can no longer signal how painful it will feel to lose money, their prefrontal cortex -- the "thinking" part of the brain -- leads them to sample cards from all the decks until they go broke. "The process of deciding advantageously is not just logical but also emotional," concludes Antonio Damasio, chief of neurology at the University of Iowa.
| The Brain tour
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Ignoring that biological fact can cost you a fortune. During the peak of the bull market, many investors bragged that they had a high tolerance for risk. Thanks to a streak of glorious gains in the late 1990s, these investors' amygdalas had never been ignited by a major financial loss. That led all too many people to the mistaken conclusion that big losses wouldn't bother them. But big financial losses are always painful to anyone with a normal brain, because our mental circuits respond so powerfully to any vivid danger. Imagining that you can shrug off setbacks before you've ever suffered any is a disastrous illusion -- since it leads you into taking such high risks that huge losses become inevitable.
The CEO of the brain
If nothing could counter the fight-or-flight function of the amygdala, we might never have a moment's peace. Fortunately, the prefrontal cortex, a region of the brain behind the forehead, allows us to store sets of events in the form of memories, to draw general conclusions from particular data, to forecast the consequences of our actions and to compare current and past experiences -- thus helping us reach more balanced judgments. Grafman of the NIH calls the prefrontal cortex "the CEO of the brain." (He means that it makes executive decisions, not that it's corrupt.)
Grafman studied a group of Vietnam war veterans who had been injured in the prefrontal cortex. He found that the further off a financial goal was, the less planning these patients were capable of devoting to it. Grafman's experiments showed that people with cortex damage pay even more attention than normal people do to short-term goals like stabilizing their income or paying for a house within the next two years. But the injured veterans spent less than half the normal time on planning to pay for their children's college education -- and virtually no time at all on making financial plans for retirement.
Antoine Bechara points out that various forms of dementia (age-related declines in mental sharpness) can begin in the prefrontal cortex. That may explain why the elderly disproportionately fall prey to investing scams. With their planning abilities impaired, they can fail to understand the future consequences of financial decisions. "Scams often offer the prospect of immediate rewards," says Bechara. "You can only resist that temptation if you can keep the long-term consequences in mind. Even slight damage to this part of the brain can cause a myopia for the future."
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