Deal or no Deal? The Neural Basis of Decision Utility and Loss Aversion During Consumer Decision-Making

“Neural Encoding of WTP Computation During Simple Purchasing Decisions” Hilke Plassmann, California Institute of Technology John O’Doherty, California Institute of Technology Antonio Rangel, California Institute of Technology Over 43 trillion dollars in goods and services are exchanged every year in the world economy. An essential component of every marketplace transaction is a willingness-to-pay (WTP) computation in which consumers calculate the maximum amount of resources that they are willing to give up in exchange for the object being sold. This WTP is then used to evaluate whether a proposed purchasing offer is beneficial (e.g., when the WTP exceeds the price at which the product is being offered). Clearly, in order to make good purchasing decisions, individuals must be able to assign a WTP to an item that is commensurate to the utility that it will generate. Otherwise consumers would end up purchasing items for a price that exceeds their worth to them. Despite its pervasiveness and importance for consumer welfare, little is known about how the brain carries out the WTP computation in everyday transactions, or about how its ability to do so is affected by diseases such as addiction or obsessive compulsive disorders. This makes understanding how and where the brain makes these computations one of the most important open questions in the nascent field of Neuroeconomics (Camerer, Loewenstein, and Prelec, 2005). Based on the results of several previous studies, we hypothesized that activity in the medial orbitofrontal cortex (mOFC) encodes WTP. Monkey electrophysiology studies of binary choice have found that activity in the OFC encodes the expected value of the chosen action (e.g. Padoa-Schioppa and Assad, 2006). Several fMRI studies have found analogous results in humans (e.g. Daw et al. 2006, Knutson et al. 2007, Tom et al., 2007). Although all of these studies suggest that the medial OFC plays a critical role in the evaluation of choices and the computation of reward values, none of them have established that the medial OFC correlates with the subjective economic computation of WTP. We investigated the neural basis of the WTP computation by scanning hungry subjects’ brains using fMRI while they placed bids for the right to eat different junk foods in a Becker-DeGrootMarshak auction (Becker, DeGroot, and Marschak, 1964). Because of the characteristics of this auction, individuals always bid their exact WTP for the object (Wertenbroch and Skiera, 2002) and thus we get a measure of the WTP computed by the brain for every bidder and item at the time of decision-making, which we can then compare with the BOLD measure of neural activity. Subjects were asked to place bids in two different conditions: free bidding trials and forced bidding trials. In free bidding trials they chose how much to bid. In forced bidding trials they were told how much to bid. Both types of trials were otherwise identical. Each item received one bid of each kind. The only difference between both types of trials is that the subject needs to perform a WTP computation in the free trials, since she needs to decide how much to bid, but not in the forced trials, since she is told what her bid should be. Every other computation, such as the anticipated taste of the food, should be carried out equally in both types of trials. As a result, we can conclude that a brain area encodes the WTP computation whenever its activity increases with the WTP in the free trials, but not in the forced trials, As predicted, we found that activity changes within the medial OFC were modulated by the subject’s WTP in free as compared to forced bid trials. Unexpectedly, we also found that right dorsolateral prefrontal cortex (DLPFC) involved in this computation. We thus concluded that activity in the medial OFC and DLPFC encode for WTP in everyday purchasing decisions. Part of the research agenda in neuroscience related to behavioral decision research is to understand how the brain evaluates potential goals and outcomes at the time of decision-making, and how do other cognitive, emotional, and visceral processes affect the computation of economic utility. A first step in this research agenda is to understand what are the brain structures involved in the computation of (decision) utility in simple everyday purchasing decisions. Our results suggest that the medial OFC and DLPFC are places where a variety of variables computed in other brain regions are integrated into a single representation of utility. If this hypothesis is correct, other brain processes may be able to influence decision-making by modulating activity in the medial OFC and DLPFC. Additionally, our results have also implications for decisionmaking disorders and transformative consumer research. From a neuroeconomic point of view, addiction and compulsive gambling, eating, or purchasing behavior can be characterized as diseases in which the brain miscomputes the WTP of drugs, gambles, food and goods. Given our findings, these diseases might act through brain mechanisms modulating activity within mOFC and DLPFC (further preliminary evidence for this hypothesis comes from Volkow et al., 2005).