Information (painful or pleasurable) is simply input from our environment (can be in many forms) that plays a role in our decisions (after we have done a bunch of thinking and error prediction).
One example of environmental information would be the amount of money in your bank account (your saving – much like how much fat you were able to store away to survive the winter – very relevant many years ago). Another very related example would be your stock investments.
If you had bought your stocks 5 or so years ago and watched them climb (NYSE used as an example) from around 10,000 to peaking in the ballpark of 14,000 (October 2007). You feel and, according to your stock portfolio you are richer, by a considerable extent. Now with the current dramatic drop in the NYSE (over the last month – and currently very volatile) you suddenly feel poor, you feel terrible. You have lost so much money. The information has been devastating.
However, there is an open argument that all those past good feeling (see information can be painful or pleasurable to the brain) with the rising heated stock market were all just an illusion based on greed, unsustainable consumerism, and excessive optimism. And while intellectually you might be able to realize and rationalize this – I am not sure your brain does – because mostly we still run on emotions. Emotionally this huge loss makes you feel terrible – even though in ‘reality’ you never were really that rich (it was all an illusion). In an attempt to explain this I will turn to the endowment effect.
The Endowment effect:
The endowment effect is a phenomena they study in neuroeconomics. It is when we value, and suffer a greater loss to (related but distinct from loss aversion), something we have owned compared to something of equal value we haven’t. Take for example a toaster (trying to pick something without over emotional value) and if somebody happened to come into your kitchen and wanted to buy it you would place say a 30 dollar value on it. But if you went into their kitchen and they were willing to sell you a waffle iron (and say you like making waffles and you were in the market for this device) you would likely value it less than 30 dollars even though if you went to various stores these two devices for this argument purpose would be exactly the same price.
I am probably not explaining the endowment effect very well, but once people take possession (own) something they put a higher value on it compared to an objectively equally priced different object. Even say a coffee cup once you own it if somebody was willing to trade an identical coffee cup and pay you 3 dollars you would turn down the deal (or at least most people would).
The endowment effect is only one example of how humans are not the rational animal as depicted and formalized in most economic theories since the time of Adam Smith (1776). Other examples of human irrationality include loss aversion, and hyperbolic discounting to name a few.
Possession appears to be not only 9/10th of the law, but also a large influence on valuation in our brains.
The Endowment effect of ideas and hopes:
I wonder if it is similar for ideas that we hold, or even our hopes?. Therefore, I propose an extension of the endowment effect to include ideas we hold in our brains, or hopes of a future prospect.
Say I believe in capitalism and as a thinking trader would the recent stock market ‘crash’ which seem to come out of nowhere – compared to what we thought was going to happen – change my thinking. How could there be such a downfall of the banking/lending system? Would this shake a young person’s faith in absolute capitalism? Does it make them wonder about the value of ‘regulated’ economy at whatever level? Of course in reality the world is not black and white – capitalism vs ‘regulated’ (I don’t want to use any emotionally charged words for this type of economy). In most cases things are somewhere in between extremes. But here is an idea, capitalism, which we first held in our head because of the way we were brought up (taught, assimilation or combination) and does new information influence if we decide to keep this idea or look for a new one? The same could be said if you grew up in a non-capitalistic society and the society crashed (e.g. Russia) would you change your thinking about economics. Of course there are many other ideas we could use as examples which include religion, sexuality, morals, etc.
Ideas are abstract, they are what some might argue built on pure information (though not perfect information). And new information (that we acquire through experiences in our environment) can alter the ideas we hold.
Now ideas are abstract as compared the sense of owning a consumer object such as a toaster, but what about another abstract notion – hope ?
What is hope: “To wish for something with expectation of its fulfillment.” It also usually include a certain level of confidence in obtaining the expectation. Hope is prominent in humans lives, you could say it is one of the primary drives of humans. I wonder if animals have hope as we imagine it? Most likely they do, at least at some level – they run down to the stream in hope of finding water there as an example. And there are animal model of learned helplessness in which they have somewhat ‘lost hope’.
So are hopes similar to either material things (toaster), or ideas/beliefs as I outlined above? Could there be a hope endowment effect? If in your mind you had hoped, and had things all planed in your head, of a certain future life. For example say that you planned on going to law school – you want to be a lawyer. Then suddenly through whatever circumstances, or situation, you do not manage to get into law school. Your dreams and hopes are dashed and you feel a loss – even though this was something you never ‘owned’. Do you place a higher value to that future life than an equally prosperous life say as a doctor? I think there is a possible endowment effect of ideas, hopes, and dreams that you have held dear to your heart. You have an emotional investment (but in theory you could take out the emotional side of this argument according to the endowment effect observed in humans) in this idea of your future – you own it at some level. So you wouldn’t trade it for something of equal value or even for an objective higher value – if the endowment effect applies to this case.
So back to what you feel, or what cost you incur, when you fail to achieve what you had hoped for? Did you really lose anything because of lost hope? Most of us would say of course it feels like a great loss inside, even if the ‘object’ of hope is replaced with something of ‘equal’ value. This would appear to be an endowment effect of hope.
Keep the ability to change your mind/brain:
But is there an importance to be able to quickly and at a low cost (to increase transactions of ideas) to exchange ideas?
As a good scientist one has to be able to change their ‘beliefs’ of what is true based on new evidence – no matter how much they thought they knew (or hoped) was the truth for a certain particular question.
At the individual level, beyond money and science, we hold world views, and microscopic life views, we hold hopes and dreams (e.g. medical school). Many, if not almost all, are not based on a subjective testable truth – but something closer to a gut feel, a belief, a feeling, an emotion.
While there has been a recent return to study of the importance of emotion in human decision processing, for too long we ignored the importance of emotion (possibly because it can be a bit messy – but so is our decisions). Emotions appear to play a dominating role in human decision processing despite how we try to rationalize our decisions.
These include everything from: beliefs (even science ones), over spending, future careers, going into debt, starting a diet, starting an exercise program, falling in love, over eating, etc.
Take home message:
Be open to new information and be able to resist the endowment effect of ideas so you can absorb a new idea and throw the old one out if the information warrants it. Interestingly, advances in economics comes largely down to reducing the cost of transactions (including the cost of trust) and I would say the same is true in the world of ideas. You need to be able to lower the cost (including emotional) of changing your mind, changing your ideas.
Do you own your ideas or do they own you?
One must keep the flexibility to change one’s mind, ideas, opinions etc. It is all part of keeping a healthy brain. In most cases new information is the source of our brain changes so don’t underestimate it. And this is the case for ‘bad’ information that might change a long held cherished idea or good information that gives you enough evidence to commit to an idea you have been on the brink of (though remember you must maintain the ability to change your new idea based on even newer information).
But as for hope I am less convinced about the need to quickly switch hopes – hope is incredibly powerful and important to human survival.
Tomorrow I will attempt to tie in human hope with brain energy/efficiency – yes I know it sounds strange – but what the heck I might as well try.
(okay, I know I said I would try for shorter snappier blog pieces, but this one got the best of me)
Update: link to my neuroscience of hope entry.