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His concern about the letter from the Economic Journal was not unjustified. The bitter recollection of one particular annual meeting of the American Economic Association remained fresh in his mind. It took place as Loewenstein neared the completion of his PhD, not too many months before he landed a position at the University of Chicago. The conference included a career-placement component, with university recruiters on hand, searching for the best and brightest in the field. While each of his Yale classmates had 15-20 interviews lined up (by invitation only), Loewenstein, whose research didn't exactly align neatly with conventional economics, had just one. Worried about how he was going to earn a living, he decided to check out the nonacademic openings at some of the corporate booths and ended up interviewing with Quaker Oats for a brand manager position. Having always desired to work in academia, he wondered whether he'd wasted four years of his life getting a PhD to sell oatmeal.
Ultimately, he landed a job in academia, but as the unpublished professor sat alone in his office two years later with his unopened letter, his future was far from secure. After he nervously opened the letter and read the publisher's decision, he immediately called his wife to share the news. He would not be unemployed anytime soon. "That was a lifesaver for me," says Loewenstein, now the Herbert A. Simon Professor of Economics and Psychology at Carnegie Mellon. "I still have fond feelings toward the editor of that journal for being so open-minded."
It has been 21 years since Loewenstein opened that letter. He has since published more than 100 papers, edited five books and written one, been an invited speaker 140 times just since 1995, and either authored or coauthored 25 book chapters. Clearly, his work has become more accepted throughout the years, and he is now considered by many of his colleagues to be one of the most influential researchers in his field.
Despite his rise in stature in the academic community, Loewenstein hasn't been complacent. In fact, some of his latest work may turn out to be his most important. It calls into question century-old economic theory. It's certainly grabbing more headlines from mainstream media than anything he published previously.
To understand his latest research, it's important to first comprehend its evolution. In the late 1980s, Loewenstein's papers joined a small but growing body of research that reintroduced psychology into the economic mix. The line of thinking eventually sprouted into behavioral economics, now considered a subset of economics. Mainstream economists, schooled in rational choice, did not necessarily welcome it with open arms. It included feelings, emotions, and impulses–factors that did not fit cleanly in the mathematical formulas they favored. Interestingly, however, Loewenstein discovered that psychology and economics were very much intertwined before the turn of the 20th century. However, the economic community at that time, looking to gain respectability for its burgeoning field, distanced itself from psychology, also just finding its legs as a discipline, because it was considered less "scientific." To Loewenstein, this was a big mistake.
Now Loewenstein has taken behavioral economics a giant step forward by doing what some researchers think is impossible–measuring thoughts and feelings. Using magnetic resonance imaging (MRI) equipment (the same test hospitals use to scan bodies for structural abnormalities such as tumors or strokes), he and his collaborators are scanning people's brains to explore "the most fundamental economic activity"–what goes on inside our heads when we're deciding what to buy. His research with MRI has helped launch the promising new field of neuroeconomics, a combination of neuroscience, psychology, and economics. In the past few years, it has caught the attention of the popular press, including The New York Times, The Economist, and The Wall Street Journal, which have featured Loewenstein's work.
An MRI machine is a large metal box that looks something like a giant porcelain flower vase lying on its side. It includes a sliding gurney that juts out from its narrow, tunnellike mouth. Subjects in Loewenstein's buying choices studies lie face up on the gurney, with a high-tech mask of sorts placed over their heads, and are slid into the machine headfirst. While lying inside, the volunteers view images through the mask in four-second intervals. First they see a college-friendly product such as a USB flash drive; a Napoleon Dynamite DVD; or a waterproof, disposable camera. The product is followed by its price, which is followed by a screen asking them to make a decision. The volunteers, while remaining as still as possible, answer using handheld devices. They are given a $40 credit at the start of testing and are told that if they decided to buy any of the products (at about 75 percent below retail), two of their choices would be randomly given to them at the end of the test and they could keep any leftover change. If they choose not to buy, they pocket 40 bucks.
Throughout the process, the MRI snaps pictures of the brain, registering where the blood and oxygen are flowing, which tells researchers what parts of the brain are active. The end result is a series of high-resolution images that show a detailed outline of the brain in black and grey with colored boxes clumped together representing brain activity at any given point in the test. Using what neuroscience research has already discovered about what roles the different parts of the brain play, neuroeconomists can better understand how the brain processes information and makes decisions.
In Loewenstein's MRI study, with Brian Knutson of Stanford University and Drazen Prelec of the Massachusetts Institute of Technology, he discovered new neuroscientific evidence to support what he had long suspected–parting with money is painful. Different parts of the brain were at work at different stages in the decision-making process. When volunteers were first presented with a product, especially something they found desirable, the nucleus accumbens–a region of the brain known for processing actual and anticipated rewards and pleasures–jumped into action. When the price popped up on the screen, however, two other regions fired up–the insular cortex, associated with the anticipation of pain and monetary loss, and the medial prefrontal cortex, a region associated with rational analysis. Most telling was the direct correlation between the latter two regions when subjects made their decisions. When a price appeared that seemed too steep, the brain's pain processing center (the insular cortex) lit up, while the brain's engine for logical analysis (the medial prefrontal cortex) slowed down. Conversely, when a subject decided to buy a product, the prefrontal cortex was the most active region, suggesting that the brain quickly crunched the numbers and determined that the product was a good purchase. The results were so clear that Loewenstein and his colleagues were able to predict with some reliability whether subjects decided to buy or reject products just by looking at the MRI scans right before volunteers made their decisions. For example, if the insular cortex was active, chances are the subject clicked the "no" button.(Continued …)