Why are we more likely to decide to purchase if we pay with a credit card rather than cash? What can we learn about decision-making from birds? How much truth is there? The answers to these and many other questions were revealed to us in an interview Dražen Prelec, a Croatian scientist who has been living and working in Boston, United States, for many years. He completed his studies in applied mathematics at the prestigious Harvard University, where he also earned his PhD in experimental psychology. Today, he is a professor at the prestigious Massachusetts Institute of Technology (MIT), where he teaches in the departments of management, economics, and neuroscience.
The question ‘How much truth is there?’ is also the title of the first episode of the new scientific travel documentary series ‘AHA!’ which began airing yesterday on HRT, in which Croatian actor Ivan Đuričić visited Prelec in Boston and asked him interesting questions about science, as well as about his life in the USA.
This is a series authored by Tamara Babun and Una Radić from the Zagreb production company Wolfgang&Dolly, who co-wrote the script, directed, and produced the series. In addition to Boston, Đuričić visits Hamburg, Erlangen, Nuremberg, and Copenhagen through four episodes of the series ‘AHA!’, where he is welcomed by scientists Nedjeljka Žagar, Ana-Sunčana Smith, and Iva Ridjan Skov.
On this occasion, after the first aired episode and in anticipation of the second, we spoke with Prelec, who described to Lider what he researches in the fields of behavioral economics, neuroeconomics, and neuroscience, and how these studies can be applied to today’s society.
You were born in Zagreb, attended primary and secondary school between Zagreb and Princeton, and completed your studies in applied mathematics at Harvard University. What did your journey from Croatia to the USA look like?
– My father, Krsto Prelec, was a physicist and developed his career between Zagreb (Ruđer Bošković Institute) and American scientific institutions, first Princeton, and then Brookhaven National Lab. Therefore, I cannot say that I arrived in the USA on my own initiative. The last year of high school found me in America, so it was natural to apply to their universities and continue with a PhD after graduation.
What challenges did you face there?
– The idea of returning was constantly present during my studies, but more as a theoretical than a concrete option. I followed events in Yugoslavia, read local newspapers in the well-stocked Harvard library, and received some by subscription, such as the weekly Danas, which arrived by regular mail, of course with a significant delay. I would say that this dilemma, which lasted quite a long time, represented my main challenge.
You also earned your PhD at Harvard, but in experimental psychology. Where did your interest in psychology come from after applied mathematics?
– In fact, I started in psychology; it was a desire since my high school days, but after the first year of study, I switched to applied mathematics. That study was freer in subject selection and allowed me to continue with psychology in my own way. I also attended courses in economics and game theory. I was intrigued by the depiction of human behavior in economic theory, which is theoretically elegant and seemingly acceptable at first glance, but upon closer examination, completely unachievable. Thus, I continued in graduate studies.
Today you live and work in Boston and research behavioral economics and neuroeconomics. Can you explain what you study through examples from these two branches?
– Behavioral economics and neuroeconomics intertwine in research, with neuroeconomics including direct measurement of signals in the brain. Measuring such signals is particularly useful when investigating subconscious influences on decisions.
As an example, I can mention a psychological phenomenon we studied in our laboratory. This is the mechanism of self-deception, when people see what they want and avoid confronting unpleasant facts. Self-deception, of course, affects the correctness of decisions, both private and business-related, in investments and entrepreneurship. Does this mean that our psyche contains two sub-personalities, one that deceives and another that is in some way its ‘victim’?
Economic theory provides the possibility of modeling such a complex psyche; neuroscience then allows for measuring brain signals at the moment of self-deception. Thus, we found that self-deception is pleasant in itself and likely relies on attention control mechanisms that prevent the assimilation of negative information.
How can the results of neuroeconomic research be applied to real problems, for example?
– Neuroeconomic research is still far from simple application, but it is already solving some interesting scientific puzzles that have macroeconomic consequences. I would cite an example from our laboratory related to credit cards, that is, the idea that consumers do not use credit cards entirely rationally. From previous research, we know that consumers are willing to pay a significantly higher price for the same product if they pay with a card, even when they have plenty of cash available. We also know that people are not aware of this, and it cannot be explained as a rational consequence of the objective financial advantages of the card as a payment method. This is evident because the incentive is stronger for certain products.
There are two psychological hypotheses that could explain consumer incentive. One is that cards eliminate the discomfort associated with the act of payment, or that they act as a kind of analgesic against that discomfort. The second hypothesis is that cards directly increase consumer impulse, as when the smell of food increases appetite. Distinguishing between these two hypotheses is difficult with behavioral methods, so we switched to fMRI, or functional magnetic resonance imaging, in our laboratory and showed, based on the activation of specific parts of the brain at the moment of consumer decision, that cards, unlike cash, indeed increase the feeling of reward, and this in brain centers that are also activated during drug consumption.
This, of course, does not mean that all card users are dependent on them, but it warns that new payment methods can create a mild, likely subconscious addiction in some people. Thus, the payment method is not a psychologically neutral mechanism.
You studied bird behavior and concluded that we share some moments in common. Could you tell us more about that?
– As a graduate student, I became involved in bird behavior research as a member of the behavioral laboratory at Harvard, founded in the 1930s by B. F. Skinner, and during my time, it was led by his successor Richard Herrnstein. Herrnstein had problems due to his controversial stance and writings on genetics and intelligence, but he kept that engagement private and did not involve students in it.
In behaviorism, birds were a subject of special attention. The species ‘columba livia domestica‘, or pigeon, has incredible visual abilities, easily recognizes details, individual people in photographs, and is willing to work for hours for a small reward. The guiding idea of behaviorism is that the rules of learning are largely universal: what applies to birds also applies to humans.
