Going broke? Blame your primitive brain

Your brain's pleasure center can lead you to financial ruin. Here's how to keep it under control.

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By Richard Conniff, MSN Money

In a famous experiment in the 1950s, scientists planted electrodes in the brains of rats, enabling them to self-administer pleasurable sensations by pressing a bar. If allowed, the rats would stimulate an area called the nucleus accumbens to the exclusion of all other activities, passing up opportunities to eat, drink or even have sex. They did it until they fell over.

Stupid rats, right? But we humans also have a nucleus accumbens, and it can take over our lives, too. If we let it, it can lead us into financial ruin. That's what happened recently to Jerome Kerviel, the junior trader at the French bank Société Général. In December, his risky bets turned a $2 billion profit. "That produced a desire to continue," Kerviel told prosecutors. "There was a snowball effect." By the time his risky investments came undone in January, Kerviel had lost the bank $7.2 billion. The trouble with chocolate cake

What was going on in his mind? And what goes on in yours? Look inside the brain

Think of the nucleus accumbens as appetite central. It's part of the primitive brain, and it has evolved to light up and get us moving forward at the sight of almost any kind of reward. It doesn't matter whether it's a piece of chocolate cake, a BMW M5 sports car, Scarlett Johansson in a party dress or a stock that gets the kind of hype Enron used to enjoy. All of them produce a surge of the neurotransmitter dopamine, and that makes the nucleus accumbens do the shimmy.

So far, so good. The problem, however, is that an activated nucleus accumbens can make boneheaded investments seem brilliant.

Researchers Brian Knutson of Stanford University and Camelia M. Kuhnen of Northwestern University's Kellogg School of Management put test subjects in an MRI machine and watched their brains as they worked through simple investment choices -- whether to buy a bond, which paid $1 every time with no risk, or either of two stocks, which could earn or lose the test subject up to $10 per turn. The researchers randomly made one stock more likely to win and the other more likely to lose, and as in the real stock market, test subjects had to figure out which stock was the winner.

The results? Seconds before making a risk-averse decision -- choosing the bond -- test subjects showed greater activation in the anterior insula, an area of the brain associated with anxiety and pain. On the other hand, before making a risky decision -- choosing a stock instead of the bond -- test subjects showed greater activity in the nucleus accumbens.

The co-authors say that when this reward center gets fired up -- for instance, after a stock-market killing -- it can increase greediness for future gains and encourage individuals to take excessive risks. That may be why so many of us fall into losing behaviors like

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chasing last year's performance in mutual funds or over-investing in an asset class that has already done very well.

"I know it sounds like science fiction," Kuhnen says. "But . . . it could very well be that this little part of your brain called the accumbens, which lights up when you see a piece of chocolate cake, is the same part that lights up when you've just earned 10% return on one stock and will dictate your behavior with regard to both chocolate cake and what stock to invest in."

Casinos may be priming your nucleus accumbens, the researchers suggest, when they surround you with inexpensive food, free booze, surprise gifts and noisy jackpot prizes. It's a way to turn risk-shy guests into spendthrift gamblers. Why you can't walk away

Likewise, in a study of direct-mail loan offers, a bank found that the simple trick of including a picture of a woman in the pitch letter caused men to respond as if the interest rate had dropped by 4.5 percentage points. The influence of one appetite on another may also explain why cocktail-party chatter is such a compelling inducement to stock-market and real-estate folly -- and particularly why the tantalizing gossip about dot-com windfalls made everybody so giddy to get in on the game and so blind to the dangers ahead.

You would think we'd be smart enough to resist. One strategy is to stay out of harm's way. Harvard economist David Laibson says he avoids casinos because, even when his gambling budget is gone, he's tempted to take out more money, "and then it gets to be an expensive night."

Along the same lines, investors can get into trouble because discount brokers and home computers make it too easy to jump in and out of stocks. These investors might do better if the process were a little less convenient. That doesn't necessarily mean going back to a full-commission broker or trading by phone. It can be as simple as a self-imposed cooling-off period. Craig Elliot, a student at the Massachusetts Institute of Technology's Sloan School of Management, got burned on Amazon.com and other tech stocks. Now he tries to wait "at least a few days" before acting on a stock that gets his attention.

Changing the way you think about stocks also can help. In one MRI study reported at a recent conference, the nucleus accumbens predictably lighted up when test subjects saw a blue square, which they understood to represent a possible cash reward. But when Rutgers University neuroscientist Mauricio Delgado asked the subjects to think of something else on seeing a blue square -- the sky or sea, instead of the cash -- that reduced the sort of brain activity associated with risky decisions.

The message is to step back and let yourself calm down. Don't think about that stock as the next Google.

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Think of it merely as a company and, preferably, as just one company in a balanced portfolio. That simple change can help you win back control of your emotional mind.

Produced by Anh Ly / Graphics by Hakan Isik

Published Feb. 18, 2008