Name: Xiaowen Li (4024167)

Module Title: Patterns of Action Dissertation (C83PAD)

Module Tutor: Professor David Clarke

Specifying the affective influences on decision making:

Rationale, efficacy and future directions

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Abstract The study of human decision making (DM) behaviour has benefited from over 3

centuries of academic discourse, and the majority of research up to the 21st century

has almost solely been informed by economic theory. An alternative emotional

account has since been provided by advocates of the emotional perspective, and

objective evidence suggests that emotions have at least some influence on human DM

behaviour. The advancement of neuroimaging technology further allows the

investigation of neural processes involved in DM behaviour, and it has been shown

that certain neural loci involved in the mediation of emotions are similarly activated

in the performance of standard DM paradigms. While the neuroimaging research has

so far merely hinted at possible emotional influences in DM behaviour, the present

essay provides a framework to evaluate the specific operation of distinct emotions in

the regulation of human DM behaviour.

Introduction

Following from the largely economic nature of DM research to date, the present essay

shall undertake a brief review of the evolution of economic DM models. It is argued

in this review, that the systematic failure of Expected Utility (EU) theory (Von

Neumann & Morgenstern, 1944) to account for the empirical data stems from its

erroneous adoption of neoclassical assumptions. Contemporary models such as

Cumulative Prospect Theory (CPT – Tversky & Kahneman, 1992) on the other hand,

provide incrementally accurate descriptive accounts of human DM behaviour,

although an adequate explanation for the basis of such models remains at large.

Attempts at explaining CPT have taken on both cognitive (Stewart et al., 2006) and

affective (Hsee & Rottenstreich, 2001) perspectives, and the subsequent sections in

the essay shall attempt to forward an affective account of DM, on the basis of

theoretical and neuroanatomical research.

From an affective perspective, research has begun to suggest that the DM comprises

of more than mere cognitive computations of choice variables, and is to a large extent

influenced by emotional impulses as well. This alternative stance is championed by

the likes of regret theory (Loomes & Sugden, 1982) and the risk as feelings

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hypothesis (Lowenstein et al., 2001), which recognise the importance of anticipated

and anticipatory emotions respectively. Proceeding from neuropsychological research,

the Somatic Marker Hypothesis (SMH, Damasio, 1994) implicates a number of neural

loci concurrently involved in DM and in emotional regulation, where specific neural

lesions which disrupt emotional control, are shown to result in deficient DM as well.

This neurological approach is similarly adopted by the present study, by reviewing the

functional imaging data implicating various neural loci concurrently involved in the

regulation of emotions and in the performance of DM tasks.

Technological advancement in neural imaging has enabled incrementally precise

functional imaging of neural activity during laboratory based DM paradigms – a.k.a.

neuroeconomics. Coupled with knowledge on the unique functions of specific neural

loci – from research in the psychological sciences, it becomes possible to infer the

underlying processes involved in human DM other than the known cognitive

computation of probabilities and outcomes. Indeed, preliminary studies have

demonstrated emotional centres in the brain (e.g. amygdale; orbitofrontal cortex –

Bechara & Damasio, 2005; insula – Sanfey et al., 2003) to be “active” during the

performance of DM tasks, thus emphasising the appeal of an emotional account of

human DM behaviour. The present essay addresses the mounting recognition for a

more specific emotional account of DM, by proposing a novel framework for

evaluating the specific influence of distinct emotions in regulating DM behaviour.

The present essay reviews the prior neuroimaging research in DM, in the hope of

facilitating an integration of economic (cognitive) and psychological (affective)

perspectives on human DM behaviour. The argument for an emotionally based model

of human DM behaviour is presented in 3 sections. The first of which provides a brief

description of the evolution of economic DM models, together with the argument that

these theories adopt an overly simplistic view of human nature. The second section

highlights the empirical and theoretical basis for incorporating emotions into models

of human DM behaviour, following largely from the SMH. The final section reviews

current neuroscientific trends in DM research, and proposes a novel approach to

evaluating the functional neuroanatomical data already available in the literature.

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Evolution of Economic Decision Making Models

As part of the argument for living a Christian life, Blaise Pascal (1670, in

Cruickshank, 1983, sec. 233) famously articulated what was perhaps the first formal

statement of choice under uncertainty (Hacking, 1975). In the classic paradigm,

Pascal argued that one ought to consider living a Christian life, based on the

probability of God’s existence, together with the perceived utility of God’s existence

(see Table. 1).

State of the world

God exists God does not exist

Live a Christian life Salvation (∞ utility) Small inconvenience Choice

Live otherwise Damnation (-∞ utility) Normal Life

Table 1: Pascal’s Wager (adapted from Baron, 2000, p. 228)

A number of inadequacies relating to the Wager have since been identified, such as

the assumption of infinite utility from salvation (McClennen, 1994), the arbitrary

ascription of probability to God’s existence (Oppy, 1990) and moral objections to the

wager itself (Clifford, 1986). However, the critical contribution of the Wager to

decision theory was not so much in its philosophical or theistic value. Rather, the

computation of outcome probabilities and utilities in order to arrive at a rational

choice, as advocated by Pascal set the precedent for subsequent theories of decision

making (DM) under risk and uncertainty.

Such was the nature of the Expected Value approach, which defined rational choice

preference to be determined by comparing the EV of 2 (or more) alternatives – where

EV = probability x value of the potential outcome. Following from the largely

economic nature of subsequent DM research, choice alternatives were usually given

by probabilistically defined monetary gambles. Unlike the dichotomous utility of

God’s existence however, the utility of money is perhaps better understood as a

continuous function of its absolute value. Crucially, this necessitated a critical

assumption of a linear utility-wealth relationship in order to remain tenable as a

normative theory of DM.

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This assumption was no more clearly violated than in the St Petersburg Paradox

(Bernoulli, 1738/1954), which defined a particular gamble where repeated instances

of a coin toss landing on tails is rewarded with the monetary outcome being doubled –

resulting in infinite EV. Yet it is perhaps obvious that a “reasonable man would sell

his chance, with great pleasure, for twenty ducats” (p.31). Bernoulli suggested that the

irregularity in the valuation of the monetary gamble may be due to the diminishing

marginal utility of absolute monetary gains, as defined by a logarithmic function

relative to total wealth (see Figure 1).

Figure 1: Utility of money as a function of total wealth (adapted from Bernoulli, 1738/1954)

While Bernoulli (1738/1954) distinguished between value maximising and utility

maximising strategies, the prescribed utility function he proposed (Figure 1) was

arbitrarily defined, and lacked an adequate empirical or theoretical basis to qualify as

a normative theory of DM. This left the door open for von Neumann & Morgenstern

(1944) to axiomatically define expected utility (EU) maximisation as a normative

model of human DM behaviour. By doing so, the Neumann-Morgenstern expected

utility (NM) theory made specific assumptions as to the nature of rational human DM

behaviour – an elaborate explication of the axioms is beyond the scope of this essay

and the interested reader is referred to the following authors (Baumol, 1972, p.545-

551; Schoemaker, 1982, p. 531-532) – allowing for empirical verification of the

theory. Suffice to say, the formally defined axioms created a test bed for subsequent

research to assess the descriptive validity of NM theory.

Since then, a large body of evidence has shown evidence of systematic and robust

violations to the independence (Allais, 1954; Ellsberg, 1961) and transitivity

(Lichtenstein & Slovic, 1971, 1973; Tversky, 1969) axioms as stated by NM theory.

Util

ity

Total Wealth

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This led to the development of several modified theories of DM, which were still very

much grounded in the normative assumption of utility maximisation. Among these,

CPT (Tversky & Kahneman, 1992) is perhaps the most widely accepted account

(Plous, 1993), not least because of its ability to account for almost all the available

data (Baron, 2000). Fundamental to CPT, its inventors defined modified probability

weighting and ‘value’ (utility) functions, so as to accommodate for the previous

empirical violations to EU theory.

Figure 2: ‘value’ utility function as defined by CPT (from Fennema & Wakker, 1997)

An elaborate description of CPT is again beyond the scope of this essay, and the

reader is referred to the following sources (Chapter 2 – Kahneman & Tversky, 2000;

Fennema & Wakker, 1997) for more detailed accounts. Briefly however, the

concavity of the ‘value’ function for gains and its convexity for losses accounts for

the empirical evidence which suggests that people are risk averse in the domain of

gains, and risk seeking in the domain of losses (Kahneman & Tversky, 1979). Also,

the steeper ‘value’ function in the domain of losses suggests that “losses loom larger

than gains” (Kahneman & Tversky, 1979, p. 279). Finally, the position of the

reference point implied that utility is a function of changes to one’s current state of

wealth, rather than its prior conception as a function of total wealth (Bernoulli

(1738/1954). In short, the formal definition of the ‘value’ function was able to

account for the vast majority of the empirical evidence, and the conceptualisation of

the ‘value’ function predicted, for instance, the operation of the framing effect

(Tversky & Kahneman, 1981; Kuhberger, 1998) among others.

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While CPT remains an excellent descriptive account of DM behaviour, it falls short in

so far as it is unable to provide an explanation as to why monetary DM should deviate

from NM theory – an explanation which has since been proposed by proponents of a

cognitive account. A study which modelled the debit (loss) and credit (gain)

frequency data in a vast sample of UK current bank accounts, derived a similar

function to that described in the ‘value’ function depicted in figure 2 (Stewart et al.,

2006). The ‘decision by sampling’ account of the research findings attributed the

human conformity to the ‘value’ function described by CPT, on the basis of its

cognitive familiarity with that in our environments. On the other hand, an affective

explanation has similarly been provided to account for the unique S-Shape of the

probability weighting function defined by CPT. Hsee & Rottenstreich (2001) propose

that in addition to the psychophysical methods employed by Tversky & Kahneman

(1992), the unique S-shape of the probability weighting function in CPT can be

attributed to affective influences as well. Specifically, they demonstrated that when

the prospect is affect-rich, then the S-shape of the associated weighting function is

considerably more pronounced than when the prospect is affect poor (see figure 3)

Figure 3: distinct probability weighting functions for affect-rich and affect-poor prospects – hypothetical (from Hsee & Rottenstreich, 2001)

Although there is ambiguity surrounding the precise cognitive and affective

explanations for CPT, it remains the most accurate account of human DM to date. The

same cannot be said for NM theory, where the empirical data seems to “suggests that

at the individual level EU maximization is more the exception than the rule”

(Schoemaker, 1982, p. 552). The failure of NM theory to account for the empirical

data can be understood by considering the neoclassical assumptions upon which it is

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based. Firstly, according to the neoclassical view of the ‘economic man’(after Mill,

1848 – see Persky, 1995), the concept of rationality necessitates that the decision

maker have perfect knowledge about the relative probabilities and outcomes of choice

alternatives. This seems an unrealistic assumption, given that real world choices are

rarely made with the knowledge of all other possible alternatives. Perhaps more

plausibly, the notion of bounded rationality (Simon, 1957) suggests that “agents

experience limits in formulating and solving complex problems and in processing

information” (Williamson, 1981, p. 553).

Secondly, the neoclassical view assumes that the choice preference of rational

individuals is such as to maximise utility (Weintraub, 2007). ‘Rationality’ can broadly

be defined as “reasoning in a way which helps one to achieve one’s goals” (Evans et

al., 1993, p. 168), with utility being a measure of the extent to which these goals are

achieved. In the economic DM models however, utility has arbitrarily been defined as

some function of the monetary value. While it is acknowledged that money may be an

important facet of human desires, it is by no means the singular purpose of human

existence. It is therefore worth considering other aspects of human desire (e.g.

Maslow, 1943) in order to arrive at a more proximal measure of utility. From an

emotional perspective, regret theory (Loomes & Sugden, 1982) suggests that

decisions are made by computing the potential for anticipated regret/rejoice in making

a particular choice. According to regret theory therefore, to maximise utility in a

particular gamble, is to maximise the potential for rejoice and to minimise the

potential for regret.

Rationale for Incorporating Emotion into Decision Making Models

From regret theory, the role of emotions seemed to gain prominence as a means of

understanding human DM behaviour. This section of the essay shall review some of

the theoretical and empirical bases for suggesting that emotions play an integral part

in human DM. Beginning with regret theory (Loomes & Sugden, 1982), the radical

view taken by the SMH (Damasio, 1994) and more recent developments in the

literature have since suggested specific means of incorporating emotion in the

modelling of human DM behaviour (e.g. Lerner & Keltner, 2000). The evidence

supporting this emotional perspective will focus on the anomalies in investment (DM)

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behaviour, where affective states have clearly been shown to mediate DM processes.

An additional rationale for reviewing investment behaviour is grounded in the

assumption that investors are thought to closely resemble the idealised neoclassical

standard of the ‘economic man’. Accordingly, clear violations of utility maximising

strategies would suggest that the neoclassical view of rationality cannot be upheld,

even where it would clearly be advantageous to do so.

In regret theory, the anticipated emotions of regret or rejoice are assumed to govern

DM, on the basis of various counterfactual comparisons. Other theories which have

adopted a similar view of the potency of anticipated emotions include decision affect

theory (Mellers et al., 1999), where choice preference is purportedly based on

maximising the potential for anticipated pleasure. Isen et al. (1988) similarly proposed

a mood maintenance hypothesis, which provides an interesting account of the concave

value function in CPT (see figure 2). According to Isen et al., people in good moods

are keen to preserve their current positive affective state, and are thus risk averse in

the domain of gains. Recently however, the validity of regret theory, and theories

incorporating anticipated emotion in general have been challenged on theoretical (e.g.

the assumption that regret and rejoice are equal and opposite – Humphrey, 2004) and

empirical (e.g. event splitting effects – Starmer & Sugden, 1993) grounds.

Furthermore, anticipated emotions are unable to provide a comprehensive explanation

beyond preference reversals (which regret theory was originally conceived to do), and

are thus insufficient as complete models of DM.

In a review of the literature concerning the affective influences on DM, Lowenstein &

Lerner (2003) distinguish between expected emotions and immediate emotions. They

further argue that theories incorporating merely expected emotions – like regret

theory – provide inadequate accounts of the affective influence on DM, likewise with

theories incorporating merely immediate emotions (e.g. Lowenstein et al 2001). In

their paper, Lowenstein & Lerner (2003) propose a hypothetical framework (see

figure 4) as to how expected and immediate emotions might interact to influence DM

behaviour, suggesting that a comprehensive model of DM need necessarily account

for both these sources of emotional influence.

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Figure 4: Hypothetical framework describing the interaction between the determinants and consequences of immediate and expected emotions (from Lowenstein & Lerner, 2003)

The SMH (Damasio, 1994) proposed that human reasoning and DM are contingent on

multiple levels of neural operation, some of which are consciously overt, while others

– like emotions – are beneath our conscious awareness. Importantly, the SMH does

not distinguish between expected and immediate emotions, but is rather based on a

more holistic view of emotions. The SMH postulates that somatic markers – derived

from secondary emotions and regulated by the ventromedial prefrontal cortex

(vmPFC) – restrict the decision to a particular subset of choices, among all other

possible alternatives. The SMH was formulated on the basis of behavioural

observation of patients with specific lesions to the vmPFC, who demonstrated marked

reductions in visceral somatic responses. Subsequent empirical tests of the SMH took

the form of the Iowa Gambling Task (IGT, Bechara et al., 1994), which revealed a

relative impairment of vmPFC lesion patients in the task. It was deduced that an

impairment in the representation of emotional states (through somatic markers)

resulted in the failure to associate aversive (disadvantageous) card selections with

negative emotional states, thus resulting in a poorer IGT performance.

The SMH and the subsequent tests of its hypotheses provided a neuropsychological

basis for the role of emotions in DM. Other evidence alluding to the emotional

influence on DM arises from investment behaviour, where market research has

indicated a distinct effect of emotions on investment performance. For example,

Seasonal Affective Disorder (SAD) – brought about by prolonged hours of darkness

during winter – is a phenomenon known to affect a significant proportion of the

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population, with effects similar to that of depression (Rosenthal et al., 1984). In a

study of stock markets in both the northern and southern hemispheres, Kamstra et al.

(2003, p. 324) demonstrate “a SAD effect in the seasonal cycle of stock returns…

even after controlling for well known market seasonals and other environmental

factors”. This effect is even more remarkable, given that the SAD effect is 6 months

out of phase in the northern and southern hemispheres, in line with the onset of

winter. More generally, the amount of morning sunshine has also shown to be

strongly correlated with the stock returns of that day (Hirshleifer & Shumway, 2003).

One shortcoming of the SMH is that it failed to distinguish between the expected and

immediate emotional influences on DM. Following from the distinction made by

Lowenstein & Lerner (2003), it is argued that a complete model of DM must

incorporate such a level of specificity. Furthermore, the SMH and the hypothetical

framework put forth by Lowenstein & Lerner, fail to provide an account for the

specific influence of distinct emotions on DM, such as anger and fear (Lerner &

Keltner, 2000). The final section of this essay addresses this inadequacy in the

literature reviewed thus far, by proposing a neuroscientific approach to investigating

the specific influence of distinct emotions in DM.

Neuroscience as a Means of Investigating the Role of Specific Emotional Influences on Decision Making

The advancement of neuroimaging techniques in recent years has enabled

psychologists to investigate with greater precision, the role of specific neural loci in

the experience of distinct emotions (see Adolphs, 2002). Similarly, decision scientists

have increasingly employed neuroimaging techniques to ascertain the neural loci

involved in performing DM tasks – a.k.a. neuroeconomics. It is thus somewhat

surprising that advocates of the emotional perspective have been slow to capitalise on

this established method, as a means of investigating the role of specific emotional

influences on DM. This section of the essay shall perform a cross comparison of

selected research in both the fields of affective neuroscience and neuroeconomics, in

order to highlight the potential for future advancement of the emotional perspective.

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The beginnings of the neuroscientific approach can arguably be traced to the SMH,

where the vmPFC was first identified as being a critical neural structure for the

regulation of emotional states. Specifically, the vmPFC had been identified to help

“predict the emotion of the future, thereby forecasting the consequences of one’s own

actions” (Bechara & Damasio, 2005, p. 354). The amygdale was subsequently

recognised to play a crucial role in the emotional processing of choice alternatives, in

part due to its multitudinous efferent connections to the vmPFC (Bechara et al. 1999).

To put it simply, a lesion to the amygdale inhibits the subject from feeling the

unpleasant sensation of losing money, limiting the function of the vmPFC in so far as

it does not receive a signal from the amygdale. Conversely, a recent study by Hsu et

al., (2005) demonstrated that lesions to the orbitofrontal cortex (OFC) – an area

encompassing the vmPFC – led to a deficient incorporation of ambiguity (fear) into

DM. As is already well established in the literature, the amygdale is associated with

the experience of the fear emotion (Adolphs, 2002), therefore suggesting that fear

modulates DM behaviour.

Indeed, a study by De Martino et al. (2006) employed a reliable framing paradigm

originally devised by Tversky & Kahneman (1981), with subjects in a functional

magnetic resonance imaging (fMRI) scanner. Briefly, the framing effect accounts for

the concave (risk seeking) value function in the domain of losses, and the convex (risk

averse) value function in the domain of gains (see figure 2), by merely manipulating

the linguistic phrasing of 2 formally identical prospects. The fMRI imaging results

obtained revealed that the framing effect obtained was specifically associated with

activation of the amygdale. Furthermore, activity in the OFC reduced the

susceptibility to the framing effect, likely due to its modulating role between the raw

fear emotion – from the amygdale – and its influence on selecting choice preference.

In a previously mentioned study, Lerner & Keltner, (2000) argued that the fear

emotion would result in an increased perception of risk. With respect to the fMRI

study described earlier (De Martino et al., 2006), an interpretation of the framing

effect – risk aversion in the domain of gains – can thus be explained in terms of the

subject’s “fear” of losing their current endowment. More recently however, Tom et al.

(2007) demonstrate evidence which suggests that the amygdale activation is absent in

loss aversion. Regardless of the eventual outcome, the current discourse in the subject

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of emotional involvement in DM is the first step to an integration of both the

economic and affective sciences.

Having identified the amygdale as being the neural locus for the fear emotion,

subsequent neuroimaging research in DM (De Martino et al., 2006), targeted

functional analysis to this region during the performance of DM tasks. In a similar

way, the neural loci for other emotions should be targeted as the focus of future

neuroeconomic research, so as to ascertain their specific influence (and the influence

of their associated emotions) on standard DM paradigms. Proceeding with this

guideline for future research, the already established influence of emotions on DM

can be defined with greater specificity.

One such neural locus which has since been targeted is the insula, established as being

the neural locus for the emotion of disgust (Calder et al., 2000; Adolphs et al., 2003).

In an fMRI study of the ultimatum game, rejected (perceived unfair) offers were

found to be associated with significantly heightened activity in the insula (Sanfey et

al. 2003). In the ultimatum game, 2 players are assigned to different roles – the

proposer and the responder. The proposer is credited with a particular sum of money,

and makes an offer as to how much of that sum he/she decides to share with the

responder. The responder can then either choose to accept or reject the offer. If the

offer is accepted, then the money is split as defined by the offer. If however, the

responder rejects the offer, then neither player receives any money.

Contrary to the neo-classical expectations of rationality, responders typically reject

around 50% of the offers below 20% of the original sum (Camerer, 2003). The neo-

classical assumption of rational action predicts an unconditional acceptance of the

proposition by the responder, because whatever the sum of money offered, it is

infinitely better than receiving none. In an attempt to account for this apparent

deviation in rational behaviour, economic theories have modeled fairness as being a

key motivator of behaviour (Fehr & Schmidt, 1999). Alternatively, the affective

consequence of inequity (fairness) has been proposed to account for the apparently

non-rational rejection of propositions (van Winden, 2007). Taking the imaging data

from before (Sanfey et al., 2003), heightened insula activation serves to suggest that

the reason for the responder’s rejection is due to his/her disgust at the proposition.

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Once again, robust deviations from apparent rational behaviour can be explained in

terms of the affective influence on DM behaviour.

By selectively focusing future research on known emotional neural loci, the full

gamut of deviations from the NM model, in addition to other theories of rational DM

may gradually be accounted for by affective explanations. Indeed, limited research

has already implicated a number of emotional centres in the brain to be involved in

DM tasks – e.g. anterior cingulate cortex (Kennerley et al., 2006); ventral striatum

(Bhatt & Camerer, 2005). However, the emerging research is slow to draw the link

between the activation of these neural regions in DM tasks, and their known function

in the regulation of emotions.

Conclusion

The essay thus far has provided a concise rationale for incorporating emotions in the

investigation of DM behaviour. Stemming from the inadequacies of prior economic

theory (e.g. NM theory), which assume a specific form of rationality,

neuropsychological evidence (SMH) has since alluded to the importance of

incorporating emotions into the analysis of DM. Early theories attempting to

incorporate emotions in the modelling of DM behaviour have enjoyed limited

success, with the large majority either failing to incorporate certain aspects of emotion

(e.g. regret theory) or failing to provide a specific enough account of the various

emotions (e.g. SMH). The proliferation of neuroimaging research gives fresh impetus

to furthering an affective account of DM, where an integration of research in both

neuroeconomics and the psychological sciences would serve as its ammunition. As it

is, there is substantial evidence to suggest that the emotions of fear (amygdale) and

disgust (insula) are responsible for DM deviations from traditional economic theory.

Other neural loci with established emotional function should therefore be

incorporated in future functional analyses of DM, so as to elucidate our understanding

of the emotional contribution to DM.

4199 words

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