How Greed Works

Image: Hemal Sheth

Economists are pretty convinced they have you figured. You are rational and self-serving. You are Michael Douglas as Gordon Gekko in Wall Street who asserts that greed is good. Each of your desires has a utility function that you optimise in making a decision that leads to more wealth. Stop reading now and you will win lots of money. You stopped at lots. 

These assumptions have formed the basis of free market economies professed by Jon Stuart Mill and Milton Friedman who believed markets are driven by rational and predictable actors. But is that a good picture of you? Are all of your economic decisions simply governed by the greed to earn more? Let’s play the ultimatum game to find out.

I have $10 that I can share with you in any way I choose. If you accept my offer then we both keep my proposed shares. If you reject my offer, neither of us sees any of the money. What would you do if I offer to give you $9 and keep only $1? Naturally you will accept the offer. Smart; we are now both better off.  

What would you do if I offer you only $1 and propose to keep the balance $9? Studies suggest that you would reject my offer to penalise me for my stinginess. What happened to your rational and self-serving self? A greedy robot would leave no dollar on the table.  The conclusion is that while greed may influence behaviour, it is constantly kept in check by
other forces.  

In the ultimatum game, it is injustice that faces off with greed. A Princeton neuroscientist Jonathan Cohen had subjects play the ultimatum game while the respondent — you in our game — was being scanned using functional MRI (fMRI) technology that shows dynamic brain activity. He found that when given stingy offers, the anterior insula that is associated with negative emotions was active. Rationally, greed would ensure no money is left on the table. This study demonstrates, however, that greed is only part of the puzzle. It can be trumped by other emotions such as injustice that was observed in Cohen’s study.  This gives us hope.

A quick buck or a thrill of the pursuit typifies greed. In the case of the sub-prime crisis, potential home owners were offered adjustable-rate-mortgages. The mortgages had attractive introductory rates, but could increase over time. Rationally, you would reject these mortgages given their long-term risk and uncertainty.

However, greed drives you to value immediate benefits to an extent that you ignore potential future costs. A Harvard economist, David Laibson, has coined the term “hyperbolic discounting” to explain this trait. Laibson and colleagues performed fMRI brain imaging of subjects who could choose an average offer with immediate benefits or a better offer with delayed returns.  Those who chose the offer with immediate benefits showed increased activity of their emotional areas of the brain.

Greed is fuelled by dopamine, a busy hormone. Apart from keeping greed in business, dopamine’s influence extends from voluntary movement to your involuntary sex life. The anticipation of a reward shoots off dopamine that makes you feel good. In fact, it makes you feel so good that often if you actually win the award, you feel a let down.
 
The big lessons from neuroscience are that while there is a biochemistry of greed, decisions are not made simply on account of greed. The timing of the reward, notions of injustice, and apathy that sets in when the race is over work to influence greedy behaviours. Understanding these further may bring greater balance to Wall Street and levers to control
its Gekkos.

The author is a columnist for Forbes India.