Tell me what you ate so I can tell you what financial decision you will make. How the body sabotages our economic judgment
Blood sugar levels affect how we evaluate things. Researchers Xiao-Tian Wang and Robert D. Dvorak of the University of South Dakota investigated this, where people prefer some immediate rewards to larger rewards in the future. For example, most people would rather accept $100 now than wait a week and receive $110. In their experiment, Wang and Dvorak manipulated blood glucose levels using the soft drink Sprite.
Participants answered the questions twice, before and after drinking a glass of Sprite that, depending on the experimental group, contained either sugar or a non-caloric sweetener. The result: participants who drank the sugary drink were more willing to delay gratification and take more money later. Sprite – or the sugar in it – bore the brunt of future cuts. Similarly, studies indicate that people become more cooperative after enjoying a glass of lemonade, writes Dennis Proffitt in Perception.
Why Hungry Judges Always Say No
Another study looked at the decisions of parole judges in Israel. These judges must decide whether to grant release conditional to inmates who request it or are still behind bars. By far, the most common decision is the denial of release. There are, however, exceptions. All petitions are heard during a long morning session, which is interrupted by two breaks during which the judges retire and have a snack.
First thing in the morning and after each of these breaks, judges are very likely to grant parole; but over time, due to fatigue, their decisions become a “No” on the conveyor belt. When the fuel tank is empty, judges resort to the default option of just saying no. After a snack, they are more likely to analyze the case more deeply and come to a positive decision. Like any other physiological process, judgments require “fuel”.
All of this has important policy implications, particularly in education. A recent study of California public schools found that students scored, on average, about four percentage points higher on end-of-year academic tests when their schools contracted for a healthier school lunch service. Indeed, providing up to three meals a day appears to be a key ingredient in high schools serving low-income students. Similarly, children who eat breakfast at school have better attendance and fewer behavioral incidents.
If temporary undernutrition leads judges to issue less-thought-out “just say no” decisions, then imagine what chronic food insecurity does to the cognition of eight-year-olds.
Whoever you are, thinking is influenced by your current physiological energy resources. How you think is inextricably linked to how you feel physically—and how you read those feelings.
I was talking at the beginning of this article about the fact that people definitely prefer immediate rewards to bigger rewards that come in the future. This is also seen in everyday life:
Typical economic behaviors
- Savings and pensions People know they should save for retirement, but they keep putting it off—the reward is too far away. Even when employers offer double contributions, many do not participate in pension plans.
- Debt and credit cards The preference for immediate gratification leads to impulsive spending on credit, even though high interest rates mean a much higher cost in the long run. The pleasure of shopping now cognitively overcomes the pain of paying later.
- Diets and health Although it's a non-financial example, it has direct economic implications: people spend on gym memberships they don't use, on diets they abandon – future value (health) loses out to immediate pleasure.
- investment Investors sell stocks in volatile markets to stop immediate losses, even if the market recovers in the long run. The present pain is stronger than the likely future gain.
- Financial deferment Postponing tax returns, paying bills, renegotiating contracts – all have real economic costs, but the reward for the action is perceived as too distant.
Why is this happening?
The brain evaluates future rewards through a process of temporal update – the further in time the reward is, the smaller it is perceived to be. The problem is that this update is not linear (as classical economics assumed), but hyperbolic: the difference between now and tomorrow seems huge, but the difference between a year and a year and a day seems negligible.
