by Tom Purcell
Boy, is uncertainty making us uncertain.
Jonah Lehrer, a specialist in psychology and neuroscience, explains why in a recent Wall Street Journal article.
Lehrer cites an experiment in which subjects were asked how much they would offer to pay for either a $50 bookstore gift certificate or one valued at $100. They offered an average of $26.10 and $50, respectively.
Then uncertainty was added to the mix.
The subjects were told to bid on a lottery in which they were guaranteed to win either the $50 or $100 certificate.
You’d think they’d offer at least $26.10 — after all, the worst they would do is win the $50 certificate — but they were barely willing to cough up an average of $16.
Uncertainty took the gumption out of them.
Lehrer cites another experiment conducted recently by California Institute of Technology neuroeconomists.
Subjects played a simple gambling game — they bet on whether the next card from a deck of 20 would be red or black.
At first they were told how many cards in the deck were red and how many were black. This gave them some confidence in calculating the probability of the next card’s color, based on the color of the preceding cards.
And so it was that “the scientists observed increased activity in those parts of the brain, such as the striatum, involved with the expectation of rewards.”
In a second gambling game, though, subjects were not told how many red and black cards were in the deck of 20.
“With less information to go on, the players exhibited substantially more activity in the amygdala, a brain area associated with scary memories and emotional arousal,” Lehrer says.
He explains that the gambling games correspond to the way people make investment decisions.
To wit: When a set of risks is fairly well known, people are more willing to act — but when uncertainty is high, people freeze.
And boy, is our uncertainty high these days.
In one report a week back, economists discussed whether American supremacy is over and our decline is under way.
Another report says 1 million homes were foreclosed in 2010 and the housing market is in worse shape than it was during the Great Depression.
A third tells us our kids, woefully unprepared for the future, scored near the world’s bottom on math and science aptitude tests — though they’re No. 1 in self-esteem!
If that doesn’t make you uncertain about the future, this will: Government policies are making uncertainty all the worse.
Lehrer says there are 141 tax-code provisions that require congressional renewal — up from fewer than a dozen in the late 1990s.
If you are an investor, how can you make investment decisions when you have no idea what capital-gains taxes — a cost you must factor into your risk calculation — will be three or four years down the road?
If you are a small businessman, how can you determine the cost of new employees or a new plant when it’s anybody’s guess how much health care, or cap and trade — or a host of other emerging regulations — might cost you?