Friday, December 31, 2010

More on Dopamine

I feel a bit like Robin Williams in the movie Awakenings having just discovered the miracle of dopamine, but I need to write down more of this great book, "How we Decide" before it goes back to the library. Earlier I wrote about how the author explained how when our expectations have been met, our brains dopamine neurons fire away to give us those warm and fuzzy feelings about our decisions and when we make mistakes, those same neurons make us feel discomfort and at the same time correct themselves to formulate new expectations, which explains how learning from mistakes work.

Well unfortunately there's a fatal flaw with this too. The dopamine hit you get when you've been rewarded is even greater than when you receive an unexpected reward. For example, in the case of Pavlov's dog once he's learned to expect a treat at the sound of a bell, the bigger delight is in receiving the treat before the bell is rung -- hells yeah! This is why gambling is so much fun. You pull the slot and out comes the money, unexpectedly. Our dopamine neurons automatically start trying to form patterns to predict when money will likely drop, but then we soon realize that it is completely random, so we give up. Unfortunately those with abnormal dopamine levels never surrender -- they are in a constant state of blissful reward. This explains why some Parkinson's patients who are administered dopamine altering drugs also become gambling addicts as a side effect. It also explains why that first kiss is so euphoric. Sadly, expectation kills the thrill of newness and surprise.
The fatal flaw is making decisions based on patterns where there are none. We think pro athletes have hot streaks or that we can beat the stock market when really the world is a lot more random than we think. This is the gambler's fallacy -- thinking that something is more or less likely to occur based on whether that event has recently occurred. It also explains stock market bubbles. When the market booms, investors keep investing because they don't want to regret not investing and losing out on potential gains. They keep investing because they think they've figured out the market and they ignore the possibility of loss. And when the bubble bursts (because it is after all random), these same investors can't wait to get out because they don't want to regret staying in -- they panic and run. Lehrer says the best way to beat the market is to accept that it's nothing more than a random walk with an upward slope. Pick a low-cost index fund and wait -- don't fixate on what might have been, just do nothing. You'll beat the average 'active' investor by 10%!
Lastly, the other faulty part of purely emotional decision making is being tempted with instant reward. Our emotional brain has a hard time dealing with long term consequences, so we tend to gravitate to instant gratification. We also over-value loss -- in fact we avoid it like the plague, which is why credit cards are so appealing. You don't really feel like you are spending money. The author quotes research that shows paying with cc's reduces activity in the insula, part of the brain associated with negative feelings. THIS is very telling. I have a hard time saving for my long term goals like paying off my mortgage or my retirement and am often tempted by the immediate reward (did I mention that I really want another pair of boots?). Learning to compensate for the deficiencies of my emotional brain might be my panacea! Perhaps I should try paying with cash this month? Yikes. I do love a challenge though ...

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