How We Decide (13 page)

At first glance, this behavior makes no sense. Given the exorbitant interest rates charged by most credit card companies—rates of 25 percent or more are common—a rational consumer would accumulate credit card debt only as a last resort. Paying interest is expensive. And yet, credit card debt is as American as apple pie. "The people who have credit card debt are the same people who drive an extra mile to save two cents on a gallon of gas," Herman says. "They are the same people who clip coupons and comparison shop. Many of these people are normally very good with their money. But then they bring me their credit card bill and they say, 'I don't know what happened. I don't know how I spent all this money.'"

The problem with credit cards is that they take advantage of a dangerous flaw built into the brain. This failing is rooted in our emotions, which tend to overvalue immediate gains (like a new pair of shoes) at the cost of future expenses (high interest rates). Our feelings are thrilled by the prospect of an immediate reward, but they can't really grapple with the long-term fiscal consequences of that decision. The emotional brain just doesn't understand things like interest rates or debt payments or finance charges. As a result, areas like the insula don't react to transactions involving a Visa or MasterCard. Because our impulsivity encounters little resistance, we swipe our cards and buy whatever we want. We'll figure out how to pay for it later.

This sort of shortsighted decision-making isn't dangerous only for people with too many credit cards in their wallets. In recent years, Herman has seen a new financial scourge in the neighborhood: subprime mortgages. "I still remember the first subprime mortgage I dealt with," Herman says. "I remember thinking, 'This is a really bad deal. These people just bought a house that's way too expensive for them, and they don't even know it yet.' And that's when I knew that I'd be seeing a lot of these loans in the future."

The most common type of subprime mortgage that Herman deals with is the 2/28 loan, which comes with a low, fixed-interest rate for the first two years and a much higher, adjustable rate for the next twenty-eight. In other words, the loan works a lot like a credit card: it lets people get homes for virtually nothing up front, then hits the borrowers with high-interest payments at some point in the distant future. By the time the housing market went bust in the summer of 2007, subprime loans like the 2/28 accounted for almost 20 percent of all mortgages. (The percentage in poorer neighborhoods, such as the Bronx, was much higher, with more than 60 percent of all mortgages falling into the subprime category.) Unfortunately, the loan comes with a steep cost. The structure of the loan ensures that subprime borrowers are five times more likely to default than other borrowers. Once the rates start to rise—and they always do—many people can no longer afford the monthly mortgage payments. By the end of 2007, a whopping 93 percent of completed foreclosures involved adjustable-rate loans that had recently been adjusted. "When I help people with a mortgage," Herman says, "I never ask them about the home. Because then they just start talking about how pretty it is and how the extra room will be so great for their kids. That's just temptation talking. I make sure we stick to the numbers and that we especially focus on their interest payments in the future, after the rates are adjusted." While 2/28 loans tempt consumers with low initial payments, that temptation turns out to be extremely expensive. In fact, subprime loans even proved tempting for people with credit scores that qualified them for conventional loans that had far better financial terms. During the peak of the housing boom, 55 percent of all 2/28 mortgages were sold to homeowners who could have gotten prime mortgages. Although prime mortgages would have saved them lots of money over the long term, these people just couldn't resist the allure of those low initial payments. Their feelings tricked them into making foolish financial decisions.

The pervasive reach of credit cards and subprime loans reveals our species' irrationality. Even when people are committed to long-term goals, such as saving for retirement, they are led astray by momentary temptations. Our impulsive emotions make us buy what we can't afford. As Plato might have put it, the horses are pulling the charioteer against his will.

Understanding the circuitry of temptation is one of the practical ambitions of scientists studying decision-making. Jonathan Cohen, a neuroscientist at Princeton University, has made some important progress. He's begun to diagnose the specific brain regions responsible for the attraction to credit cards and subprime loans. One of his recent experiments involved putting a subject in an fMRI machine and making him decide between a small Amazon gift certificate that he could have right away and a slightly larger gift certificate that he'd receive in two to four weeks. Cohen discovered that these two options activated very different neural systems. When a subject contemplated a gift certificate in the future, brain areas associated with rational planning, such as the prefrontal cortex, were more active. These cortical regions urge a person to be patient, to wait a few extra weeks for the bigger gain.

However, when a subject started thinking about getting the gift certificate right away, the brain areas associated with emotion—such as the midbrain dopamine system and nucleus accumbens—were turned on. These are the cells that tell a person to take out a mortgage he can't afford, or run up credit card debt when he should be saving for retirement. All these cells want is a reward, and they want it now.

By manipulating the amount of money on offer in each situation, Cohen and his collaborators could watch this neural tug of war unfold. They saw the fierce argument between reason and feeling as the mind was pulled in contradictory directions. The ultimate decision—whether to save for the future or to indulge in the present—was determined by whichever region showed greater activation. The people who couldn't wait for the bigger gift certificates—and most people couldn't wait—were led astray by their feelings. More emotions meant more impulsivity. (This also helps explain why men who are shown revealing pictures of attractive women, what scientists refer to as "reproductively salient stimuli," become even more impulsive: the photos activate their emotional circuits.) However, subjects who chose to wait and receive the larger Amazon gift certificates later showed increased activity in their prefrontal cortices; they did the math and selected the "rational" option.

This discovery has important implications. For starters, it locates the neural source for many financial errors. When self-control breaks down, and we opt for the rewards we can't afford, it's because the rational brain has lost the neural tug of war. David Laibson, an economist at Harvard and coauthor of the paper on the monetary-reward experiment, notes: "Our emotional brain wants to max out the credit card, order dessert, and smoke a cigarette. When it sees something it wants, it has difficulty waiting to get it." Corporations have learned to take advantage of this limbic impatience. Consider the teaser rates offered in credit card solicitations. In order to entice new customers, lenders typically advertise their low introductory charges. These alluring offers expire within a few short months, leaving customers stuck with lots of debt on credit cards with high interest rates. The bad news is that the emotional brain is routinely duped by these tempting (but financially foolish) advertisements. "I always tell people to read
only
the fine print," Herman says. "The bigger the print, the less it matters."

Unfortunately, most people don't follow Herman's advice. Lawrence Ausubel, an economist at the University of Maryland, analyzed the responses of consumers to two different credit card promotions used by actual credit card companies. The first card offered a six-month teaser rate of 4.9 percent that was followed by a lifetime at 16 percent. The second card had a slightly higher teaser rate—6.9 percent—but a significantly lower lifetime rate (14 percent). If consumers were rational, they would always choose the card with the lower lifetime rate, since that's the rate that would apply to most of their debts. Of course, this isn't what happens. Ausubel found that the credit offer with the 4.9 percent teaser rate was chosen by consumers almost three times more often than the other. Over the long term, this impatience leads to significantly higher interest payments.

When people opt for bad credit cards, or choose 2/28 mortgages, or fail to put money in their 401(k)s, they are acting just like the experimental subjects who chose the wrong Amazon gift certificate. Because the emotional parts of the brain reliably undervalue the future—life is short and we want pleasure
now
—we all end up spending too much money today and delaying saving until tomorrow (and tomorrow and tomorrow). George Loewenstein, the neuroeconomist, thinks that understanding the errors of the emotional brain will help policymakers develop plans that encourage people to make better decisions: "Our emotions are like software programs that evolved to solve important and recurring problems in our distant past," he says. "They are not always well suited to the decisions we make in modern life. It's important to know how our emotions lead us astray so that we can find ways to compensate for these flaws."

Some economists are already working on that. They are using this brain-imaging data to support a new political philosophy known as asymmetric paternalism. That's a fancy name for a simple idea: creating policies and incentives that help people triumph over their irrational impulses and make better, more prudent decisions. Shlomo Benartzi and Richard Thaler, for example, designed a 401(k) that takes our irrationality into account. Their plan, called Save More Tomorrow, neatly sidesteps the limbic system. Instead of asking people if they want to start saving right away—which is the standard pitch for a 401(k)—companies in the Save More Tomorrow program ask their employees if they want to opt into savings plans that begin in a few months. Since this proposal allows people to make decisions about the future without contemplating possible losses in the present, it bypasses their impulsive emotional brains. (This is roughly equivalent to asking a person if he wants a ten-dollar Amazon gift certificate in one year or an eleven-dollar gift certificate in one year and one week. In this case, virtually everyone chooses the rational option, which is the larger amount.) Trial studies of this program show it's a resounding success: after three years, the average savings rate has gone from 3.5 percent to 13.6 percent.

Herman is content with an even simpler solution. "My first piece of advice is always the same," he says. "Cut up the damn cards. Or put them in a block of ice in the freezer. Learn to pay with cash." Herman knows from experience that unless people get rid of their credit cards, they won't be able to stay on fiscally sound spending plans: "I've seen people who have more debt than you can believe, and they'll still make irresponsible shopping decisions if they can charge it." It's not easy for the brain to choose a long-term gain over an immediate reward—such a decision takes cognitive effort—which is why getting rid of anything that makes the choice harder (such as credit cards) is so important. "Everybody knows about temptation," Herman says. "Everybody wants that new pair of shoes and the big house. But sometimes you have to say no to yourself." He tries to quote a famous song by the Rolling Stones but he can't quite remember the lyrics. The message of the chorus is simple: you can't always get what you want, but sometimes
not
getting what you want is just what you need.

The summer of 1949 had been long and dry in Montana; the grassy highlands were like tinder. On the afternoon of August 5—the hottest day ever recorded in the area—a stray bolt of lightning set the ground on fire. A parachute brigade of firefighters, known as smokejumpers, was dispatched to put out the blaze. Wag Dodge, a veteran with nine years of smokejumping experience, was in charge. When the jumpers took off from Missoula in a C-47, a military transport plane left over from World War II, they were told that the fire was small, just a few burning acres in the Mann Gulch river valley. As the plane approached the fire, the jumpers could see the smoke in the distance. The hot wind blew it straight across the sky.

Mann Gulch is a place of geological contradiction. It is where the Rocky Mountains meet the Great Plains, pine trees give way to prairie grass, and the steep cliffs drop onto the steppes of the Midwest. The gulch is just over three miles long, but it marks the border between these two different terrains.

The fire began on the Rockies' side, on the western edge of the gulch. By the time the firefighters arrived at the gulch, the blaze had grown out of control. The surrounding hills had all been burned; the landscape was littered with the skeletons of pine trees. Dodge moved his men over to the grassy side of the gulch and told them to head downhill, toward the placid Missouri River. Dodge didn't trust this blaze. He wanted to be near water; he knew this fire could crown.

Crowns occur when flames get so high they reach into the top branches of trees. Once that happens, the fire has too much fuel. Hot embers begin to swirl in the air, spreading the fire across the prairie. The smokejumpers used to joke that the only way to control a crown fire was to pray like hell for rain. Norman Maclean, in his seminal history
Young Men and Fire,
described what it was like to be close to such a fire:

It sounds like a train coming too fast around a curve and may get so high-keyed that the crew cannot understand what their foreman is trying to do to save them. Sometimes, when the timber thins out, it sounds as if the train were clicking across a bridge, sometimes it hits an open clearing and becomes hushed as if going through a tunnel, but when the burning cones swirl through the air and fall on the other side of the clearing, the new fire sounds as if it were the train coming out of the tunnel, belching black unburned smoke. The unburned smoke boils up until it reaches oxygen, then bursts into gigantic flames on top of its cloud of smoke in the sky. The new [novice] firefighter, seeing black smoke rise from the ground and then at the top of the sky turn into flames, thinks that natural law has been reversed.