Transcript Learn@Lunch with Scientia Fellow Associate Professor Elise Payzan-Le Nestour

Can we prevent future financial crises with neuroeconomics?

14 November 2018

 

Welcoming remarks by Professor Richard Dunford, Associate Dean, International and External Relations, UNSW Business School

Good afternoon ladies and gentlemen. We will get underway. First of all, welcome to you all and thank you for joining us for this month's Learn@Lunch, which is our bite size lecture series with UNSW Sidney's leading academics. My name is Richard Dunford, I'm the Associate Dean, International and External Relations for the Business School and along with my colleagues, I'm delighted you could join us today. Before we get started, I would like to take this moment to acknowledge the good people of the Eora Nation, the traditional custodians of this land and I'd like to pay my respects to the elders both past and present.

A few housekeeping notes just for a moment, just two things. First, today's session will be recorded, audio recording and it will be available for podcasting via the UNSW alumni website. Secondly, please have your mobile phones switched to silent. The speaker today is Professor Elise Payzan-Le Nestour, who is a Scientia Fellow, Associate Professor at UNSW Business School. She's widely recognized as one of the leading experts in the emerging field of neuro-finance. Her research program aims to clarify how people perceive and react to financial risks using a combination or theoretical and experimental methods drawn from decision neuroscience, experimental economics and financial economics.

Elise has been collaborating with top behavioural scientists worldwide both from North America, Caltech, Brown University, Columbia University and the Wharton School and then Europe with Geneva University. She obtained her PhD in finance from the Swiss Finance Institute at the Ecole Polytechnique Fédérale de Lausanne. Prior to studying finance at the ASFI, she completed the first part of her PhD at the London school of Economics and also studied economics at Princeton University in the US.

She also holds a diploma of Engineer Statistician from the ENSAE Paris and graduated from the Ecole normale supérieure de la rue d'Ulm in Paris. She joined the UNSW Business School in September 2010. Elise will now give a presentation for around 40 minutes followed by 10 minutes of Q&A. Please join me in welcoming Elise.

2.45 Learn@Lunch presentation with Professor Elise Payzan-Le Nestour

Thank you very much. Hello, thank you very much, Richard. Hello everyone. I'm really delighted to be here with you today and I promise you that I'm not going to ruin your lunch by delivering some indigestible speech. Rather, what I have in mind doing with you today is to tell you about a new exciting multi-disciplinary field called neuroeconomics, which ... Sorry, it's not a very good start. I apologize for the indigestible term, neuroeconomics. What it simply refers to is the use of neuroscience in the behavioural sciences in economics and finance in particular.

The reason I'm using the term here, although it's a tongue twister for me really. It's because I'm pretty sure that some of you have heard of it. There has been a lot of hype around the notion lately. It will be not for very good reasons. There have been lots of misconceptions about what neuroeconomics is about and in my thought today I'm going to debunk those misconceptions. To be more specific, my purpose in this talk is to answer the following question.

To what extent do the behavioural sciences need neuroeconomics? The question has two different aspects. The first aspect is scientific. From an epistemological viewpoint the question can be reformulated this way. Those neuroeconomics play a pivotal role in the behavioural sciences in the very precise sense that it brings behavioural insight that we could not get otherwise. Does that make sense? Yeah, great. The second aspect of the question is applied. Within the celebrated behavioural intervention paradigm, which has been popularized recently thanks to this bestseller book, I'm sure you've heard of it, Nudge by Dick Thaler and Cass Sunstein.

Viewed from the behavioural intervention paradigm, the question really is if neuroeconomics does bring unique behavioural insights, are these insights useful to policy makers? If the ultimate goal is to improve the decision making of individuals in the field. This is a key question really. Just to give you a little bit of perspective on what's coming next, this is just the appetizer. The main takeaway of my talk is going to be that the answer to the question is a definite yes.

I'm going to explain to you that neuroeconomics allows us to uncover the root causes of economic behaviour and as such, it provides unique actionable insights to policy makers. It helps them improve the decision making of individuals in the field. Okay, that's the plan and by telling you what neuroeconomics is all about, I'm going to debunk some serious misconceptions that people have about neuroeconomics, Let me tell you first what neuroeconomics is not.

Neuroeconomics is not about identifying that a given area in the brain, let's say area X, activates when people are engaged in a given decision making task. For instance, a decision making task that involves risk taking. Identifying that area X activates under risk taking compared to when people are at rest and concluding from that that area X is the risk taking region in the brain. A little reflection shows that this approach is a fallacy because in terms of insights it is not very useful to know that.

Yet, importantly this kind of visual representation appeals to our brain because the human brain does not like abstraction so much. It's really appealing to see an abstract notion such as risk taking materialize this way in the picture. I'm sure you agree with me, it's beautiful and this appeal explains that neuroeconomics when it all started in the late '90s was extremely popular. There was a lot of hype around it.

At the time, neuroeconomics was done pretty much in this period, so it was arguably and epistemological nonsense but things have changed dramatically since the early 2000s and my talk today is going to be about neuroeconomics 2.0 the new kind. Back to our question, slightly amended, the question really is to what extent do the behavioural sciences need neuroeconomics 2.0 because surely the behavioural sciences don't need the old kind.

Let's focus first on the scientific question. Does neuroeconomics 2.0 play a pivotal role in the behavioural sciences in the very precise sense that it brings behavioural insight that we could not get otherwise. To be able to answer the question I need to start with a little bit of epistemology not too much, I promise. I promised you that I would not ruin your lunch so just a little bit of epistemology, just what is needed to pin down the nature of the scientific process and to do that most effectively, I'm going to use the framework proposed by Charles Sanders Peirce in his work on the logic of science.

Peirce was an American philosopher, logician, mathematician and scientist who founded pragmatism as a philosophical movement at the end of the 19th century. Peirce proposed his view on science around 1870, so a long time ago but like with any masterpiece, his view on science has not aged at all and it remains an ideal epistemological model for modern behavioural sciences. According to Peirce, the process of scientific discovery is best described as a three stage inquiry and all three stages are highly intertwined.

The first stage is the process of inventing new ideas, new theories, which itself comprise two steps conceiving new ideas and adopting the ones that will the candidates fulfil the investigation. When trying to explain some puzzling fact, the best idea according to Peirce is the idea that best accounts for the fact in the precise sense that if the idea is true, then the fact becomes a matter of course. That's the criterion that Peirce proposed to select among different ideas. Does that make sense?

Peirce coined the term abduction or educated guessing to refer to this key stage of the scientific process in which new ideas are invented. Next comes into play the process of putting the new idea to the test and this is done in two stages. The diction, which is a process of extraction testable implications of a new idea. It's about making the new idea testable, falsifiable in a populian sense and last but not least the third stage, induction, is the process of testing these implications with empirical data. It's about reaching a verdict on the new idea.

At the end of the process, the new idea is going to be either rejected or amended and it is how science progresses. This is a loop. Do you see this? It's very important. To recap, the process of scientific discovery takes three stages abduction, deduction and induction and now that I have sketched out for you the process of scientific discovery I'm going to show to you through concrete examples how neuroeconomics plays a key path for behavioural sciences at each stage. To invent new ideas about economic behaviour, to make them falsifiable by drawing testable implications and to reach a verdict by testing these implications.

Before I start with the first bit showing to you, explaining to you how neuroscience plays a key part at the abduction stage, before we do that I just want to clarify something. I told you I'm going to use concrete examples. All these examples will be drawn from my own research. Please don't take this as reflecting the French arrogance. I'm French in case, this is obvious, yeah. Don't take this as reflecting the French arrogance. This is not because I think my research is the best. It's because with my research I know exactly, I know why and how I did it, so I'm sure I'm not going to say silly things. Just to clarify this point.

Great, so let's start with the first bit. Let me show you first, how neuroeconomics science plays a key part at the abduction stage of the scientific process to invent new ideas about economic behaviour. To see how, let's ask ourselves, where do new ideas come from? Albert Einstein told us, “From pure intuition, out of nowhere.” It is how the theory of relativity came to him, “Out of nowhere,” he said. It's important to realize that is true.

Now I would argue that for the rest of us the answer is a bit different. For the rest of us it's me, you recognize me, right? Okay, the rest of us. For the rest of us the answer is a bit different. New ideas come from addressing old questions through new lenses and neuroscience has allowed behavioural scientists to do that. It has provided them with new lenses. To say this intuitively, I better give you an example. An example of application to economics of well-established theories from neuroscience to generate new ideas.

With colleagues, we have recently addressed the old question of how people perceive risk through the lens of efficient neural coding theory. Efficient neural coding theory is the most canonical theory of sensory coding in the brain. It's about how the brain represents information about the outside world and this has generated two new ideas. The hypothesis that people underestimate risk after prolonged exposure to extreme risk. We coined the term risk-after-effect to refer to this phenomenon and the idea that people are hampered in the perception of outliers, the so called black swans. You've heard of the black swans, right? Extreme events.

This simple example illustrates how neuroscience helps generate new ideas by addressing old questions through new lenses. Okay, yeah. Great. So, now let's move on. What about at the deduction stage? Here again, neuroscience has played a key part at the deduction stage for the behavioural sciences by helping make new ideas testable and here is why. Some economic theories are not testable with behavioural data. However, their implication at the neural level can be attestable.

To help you see this intuitively, I better give you an example. One fact that has been well established both in the field and in the lab is that, when engaged in activities where a randomly occurring major loss could eradicate all previous gains human beings have a tendency to persist in the activity up until the disaster outcome eventually occurs. For those of you who have a statistics background, what I'm talking about here, it's about payoffs that are fat-tailed. It's about decision making under tail risk.

The disaster outcome is going to occur eventually, you just don't know when but surely it's going to occur and people have a tendency in these conditions to persist in the activity up until the disaster occurs and so, people are just dead after that obviously. Examples of this behaviour includes rogue driving, financial decision making ending in blow-ups et cetera, et cetera. Just in case the behaviour I'm talking about is not entirely clear, I just want to describe it a little bit differently. I'm going to use the expression from the business world. Those of you from the business world, I'm sure you know the expression. That's how the behaviour is described metaphorically.

The metaphor is picking up pennies in front of a steam roller. Do you understand the metaphor? I think it's exactly what it is, right? Okay, and in case it's still not entirely intuitive let me describe the behaviour in yet another way. I'm going to use a very famous, you probably know it already, a famous quote by Charles Prince the CEO of Citigroup during the sub-prime crisis. Prince described Citigroup continued engagement in LBO deals despite fears of reduced liquidity owing to the ongoing sub-prime crisis. Prince described Citigroup behaviour this way.

“As long as the music is playing you've got to get up and dance.” I think this is another way to describe a picking pennies behaviour. Is it clear what a picking pennies behaviour is all about? Perfect. All right, so the picking pennies fact is interesting to me for the purpose of this talk because it is puzzling. Why is it puzzling? Because the most natural causal explanations for it have been ruled out in the lab recently. In particular, the very intuitive idea that people pick pennies simply because they're unaware of the risk they're taking because people are a little bit cognitively limited. A little bit like Homer Simpson.

We all learn that from behavioural finance so that's here. It's a very intuitive idea that may pick pennies primarily because of that, because of ignorance. A very intuitive idea but it has been ruled out in the lab recently in the sense that it was shown that people pick pennies however much they're aware of the risks they're taking. You understand what I'm saying? People pick pennies however much they're aware of the risk they're taking, which shows that ignorance is not the key explanation here.

Likewise, the very intuitive explanation, which is that people may pick pennies simply for the thrill of gambling. A very intuitive idea but again, this as well has been ruled out in the lab recently. Likewise, for the very intuitive idea that people may pick pennies just because they're risk lovers. The same thing, ruled out. That's the reason that I'm saying that the picking pennies fact is puzzling. Given this to account for the picking pennies fact, a good explanatory hypothesis is H1, the idea that people pick pennies because they are greedy and lack self-control. They cannot resist the temptation to win more dollars.

Pierce would agree with me that H1 is a good explanatory hypothesis because note that if H1 is true, then the picking pennies fact becomes a matter of course, right? It is no longer [inaudible]. Yeah, good. Now the issue of H1 is that it cannot easily be tested with behavioural data to see why intuitively consider the equally good alternative explanatory hypothesis H2, which is the idea that people pick pennies because they're not afraid of the risks.

When they imagine the disaster outcome they don't feel any fear. The key point to make here is that H1 and H2 cannot easily be tested against one another with behavioural data. However, the implications at the neural level can be. These implications are if H1 is true ... Just to refresh your memory, sorry, H1 people pick pennies because they're greedy and lack self-control. All right, if H1 is true, then excessive dopamine release is the root cause underlying the picking pennies behaviour.

Dopamine is one of the key neurotransmitters of the human brain. Dopamine release is the way by which our brain tells us about potential reward opportunities making us want to gamble and gamble again. Dopamine release takes place in a deep down structure of the Brian called the VTA, ventral tegmental area VTA. VTA Dopaminergic neurons project onto this area of the brain called the Ventral striatum, where reward signals are generated, the signal towards potential reward opportunities.

If H1 is true, we should see inflated reward signals in the ventral striatum caused by excessive dopamine release because this is the ... this constitutes the key bio-mechanism underlying greed. Is the logic clear? Yeah, perfect. Tell me if it's not. I'm happy to clarify. Now if H2 is true, probably you have forgotten about H2, which understandable. So, here it is. H2 says that people pick pennies because they are not afraid of the risks. We don't feel any fear when we imagine, what is the outcome?

If H2 is the true story, then insufficient serotonin release is the root cause underlying the picking pennies behaviour. Serotonin is another key neurotransmitter of the human brain. Serotonin release is the way by which the brain tells us about potential danger, potential threat in our environment. Serotonin release takes places in a deep down structure of the brain called raphe nuclei and serotonin neurons project onto key targets of the brain, in particular the Amygdala insula. This is the Amygdala here and in the Amygdala and insula fear signal are generated to signal towards potential danger.

If H2 is true, we should see muted fear signals in the Amygdala insula caused by insufficient serotonin release because this is the key biomechanism underlying recklessness as defined here, being not afraid of the risks. Is the logic clear? Yeah, perfect. So, let's move on. The key point to make is that these implications can be tested with neural data. Like I said, we cannot test H1 and H2 with behavioural data but we can test them using neural data, we can test their implications using neural data.

I'm going to show this to you now and this brings me to the third stage, induction. The process of empirical testing of the implications drawn at the deduction stage. So, we did that, now let's see how to test these implications. To test implications of H1 there are two roots. The first root consists of testing the prediction that individuals with increased dopamine levels for genetic reasons should be more prone to the picking pennies bias compared to the rest of the population. This is the genetic root.

To implement this test with colleagues at Brown University, we are currently running a big lab experiment that involves the picking pennies behaviour with a large number of participants and we're having each participant genotyped and tested for genes associated with dopamine function. Do you understand intuitively what we're doing and why we're doing? Perfect. The second route to test the implications of H1 consist of testing the prediction that increasing dopamine levels in individuals thorough administration of dopamine drugs like that leads to an increased prevalence of the picking pennies behaviour in these individuals. Okay, perfect.

I hope I managed to give you a feel of how neuroscience plays a key part at each stage of the scientific process for the behavioural sciences, by helping invent new ideas about economic behaviour and by putting the new ideas to the test. Now because the new ideas concern the root causes of economic behaviour, they have important policy implications and this brings us to the second question, which I want to address today, the applied aspect.

I've just shown to you that neuroeconomics does bring unique behavioural insights but the key question having in mind the applied aspect. The key question now is, “Okay, are these insights useful to policy makers?” Okay, so I'm going to show to you now that the answer is definite, yes. Again, through giving you concrete examples but before we do that it's good to have some conceptual clarification. Since we are talking about the decision making of individuals because that's what the implied aspect is about, right, remember?

It's about improving the decision making of individuals in the field. Since we're talking about decision making, it's good to define rigorously what we mean by decision making. Decision making comprises two processes, so it's a dual process. Process one is about acquiring and processing information to form beliefs. Imagine you are an investor and you have to choose between different assets. To be able to do that you need to learn about the value and the risk of those assets because as you know better than I do this is not a given in real financial markets, right? It's about perception and learning.

The second bit of decision making is decision per se. It's about acting on those beliefs acquired during process one, acting on those beliefs to make a choice. Just to be more clear on this, it's important to realize that for a given set of beliefs two persons are going to behave differently because they have different risk preferences. For a given set of beliefs two persons are going to behave differently, do you understand what I'm saying, it's very important to understand that.

Process two, it's about risk preferences for a given set of beliefs. Risk lovers, you understand risk lovers what it means? People who have a high risk appetite are going to take more risk than the individual like me who's extremely risk averse. That person who is going to shy away from taking any risk. It's very important to understand that this is about risk preferences. This is about perception and learning. Does that make sense with the conception clarification, which is very important? Okay, great.

So, now neuroeconomics insights are about telling us for a given behavioural pattern, whether it is process one related or process two related or in some cases both things combined. Now the question is, why is that interesting for policy makers? Standard economics will tell you, who cares, why is that interesting to be able to flesh out the hidden causes of given observed behaviour? After all, what matters is the observed behaviour, so who cares?

I want to show to you now why we should care very much about being able to flesh out whether a given behavioural pattern is process one related or process two related. Here's a proof and again better give you concrete examples to make my point. First example, let's return to the picking pennies behaviour. I'm sure you agree with me that policy makers may want to help financial agents beat the picking pennies plague, right? But now the question is, how to do that more effectively?

The answer to the question depends on the root cause of the picking pennies behaviour. If people pick pennies primarily because they're unaware of the risk, in which case the root cause of the picking pennies plaque is process one related. It's about perception and learning. If that's the case, then a natural policy solution to the problem is to increase market transparency and educate people about the risk they're taking. Now if the root cause of the picking pennies behaviour is that people are not afraid of the risk, so the root cause is process two related, right?

Remember this explanation is H2, which we discussed before. Okay, if that's the root cause of the picking pennies behaviour, then in terms of behavioural intervention, the first thing to do is probably to forbid mood stabilizes among finance professionals. Mood stabilizers are drugs that are commonly used by all of us. Lithium is the most common substance in the category and there is some evidence from medicine that mood stabilizers may mute the fear signals that I described to you before. Remember the fear signals everybody.

Mood stabilizers may mute the fear signals, which is very, very problematic having that in mind. If that's the root cause of the picking pennies plague, surely the right policy intervention is first of all, we should forbid mood stabilizers among finance professionals since they may mute fear signals. Now if root cause of the picking pennies plague is that people are greedy and lack self-control, which is H1, which we discussed before. Then offering commitment devices to the agents so that they can protect themselves against their inner greed stands out as the right policy intervention.

In case some of you are not familiar with the notion of commitment devices, let me perhaps explain it a little it. Commitment devices are devices that allow us to tie our hands since we are intelligent creatures. So yes, I'm sure we are all very greedy. I'm super greedy. I'm sure you are as well, we are human beings but we are intelligent, we are lucid, we are self-aware. Since we know that we lack self-control, we are keen to use commitment devices to tie our hands to understand that, I think the best metaphor is the case of Ulysses.

Ulysses asked his men to tie his hands to the mast of his boat to ensure that he would not jump into the sea upon hearing the siren song. When you are tempted to do a silly thing because we just cannot resist temptation commitment devices are there to protect ourselves. I'm sure you agree with me because this is just simple logic that if the main cause of the picking pennies plague is that people are greedy and lack self-control offering the agent commitment devices stands out as the right behavioural intervention. So, it makes sense? Great.

Now earlier, I told you that recent evidence suggest that the main cause of the picking pennies behaviour is not this. I just want to clarify. This surely is a contributing factor in the field. In the sense that I'm pretty sure that many people pick pennies partly because of that. They're a little bit unaware of the risk they're taking. Sure, but what I'm saying is that it's a contributing factor. It's not the main cause because you remember what I told you. The evidence shows that people pick pennies however much they're aware of the risk. Even if they're fully aware still they pick pennies.

And, I should add that the evidence points to this as being a major cause of the picking pennies behaviour. Perhaps combined with this not that the two factors are not mutually exclusive at all. It's not either or, okay? So, having that in mind the right policy intervention in the case for the picking pennies plague is nudging perhaps combined with legislation but clearly, we should not expect that education is going to do any miracle in this case. Education alone is not going to do the trick. Importantly, education alone is not going to do the trick because like I said this surely is a contributing factor but those factors appear to be more important. Do you understand what I'm saying? It's very important.

This important example illustrates how neuroeconomics insights are very useful to policy makers to help them choose in the toolbox of potential behavioural interventions the right ones for the job. In this example nudging and legislation are the right tools to use in the toolbox. Is that clear, yeah? Perfect. So, what time is it? Perhaps I can give a second example or maybe you are tired, so we can chat if you prefer or I can give you a second example and then we are done. It's your choice, I don't want to cause any indigestion.

Maybe you had enough, we can stop five minutes? You want more? Thank you so much, it's so nice of you to say that. My French pride is very happy right now, thank you so much. Example number two, let's talk a little bit about the rogue trading plague. I'm sure that all of you you've heard of it, right? Rogue trading is a major social issue. Just in case, rogue trading refers to ... the rogue traders are traders who make unauthorized trades to increase profits and this expose their firm to major, major loses.

The most famous case is probably Nick Leeson who caused the collapse of Barings Bank, it's kind of an extreme example and unfortunately there are many others in the same vein. I'm sure we all agree that rogue trading is clearly an issue that policy makers may want to address and in many respects the policy makers have addressed the problem. The standard policy consists of increasing vigilance. I guess the official way to put it, it's diligent oversight from the banking management. Clearly, this is a very good measure, quite effective, so there's no questioning of that but I would like to stress here that the standard policy implicitly assumes that the cause of the rogue trading plaque is only like a single cause. It's about the rogue traders having an abnormally increased risk appetite.

This is process two, it's process two related. It's about the risk preferences. The idea here is that rogue traders are bad apples. They're a little bit like crazy guys and they have exacerbated risk appetite and in many cases I have no doubt that it is very true. So again, there's no questioning of that. However, an important point to make is that there is a consensus among experts that even with the best technology and the best oversight, a rogue trader will eventually succeed at breaking the bank. Having this sad fact in mind, I guess, we have strong incentives to try to find some preventative measures and actually, neuroeconomics can help us do that.

Recent neuroeconomics research points to a mechanism that was completely left into the shade until recently, which is the idea that rogue traders are blind to risk. As a result of being routinely exposed to extreme risk they are blind to risk. Blind is the key word here. It's about risk blindness. Here it's process one related, we are talking about perception. They're blind to risk. You see the difference, a very different explanations. This is about risk preferences, this is about the risk perception. The metaphoric is as if they cannot see. They cannot see any more after being exposure to high risk for a prolonged period of time.

Having that phenomena in mind, then a natural policy solution is to implement organizational changes to be more specific the idea is to ensure rotations in functions for risk takers to avert the prolonged exposure to high risk. If you ensure that the traders are rotating functions, mechanically you just make sure that they're not exposure to high risk in a prolonged period of times, so this should do a trick having in mind of this issue.

Again, this example I think is interesting because it shows how neuroeconomics insights can help us complement the standard policy that has been already used and so ... and I guess, I'm going to stop here. Thank you very much for your attention.

43.50 Q&A

Richard D: Please stay. Now we have about 10 minutes, if anyone would like to ask any questions? We'll start here thank you.

Speaker 3: Okay, thank you. So the premise of this is that the data is more or less consistent in the terms of what we can understand about the neural pathways and hormonal reflections and the outcomes. If we look at the case of process one, in this latest example you've shown how prolonged behavior has changed some of those patterns. Does that mean that moving to the future it might get more tricky to make these conclusions because let's say people's behaviors or let's look at how technology might affect people's behaviors and evolution might play a role? Are you concerned about that and what the implication that might be for neuroeconomics ?

Prof. Elise P: I'm not quite sure ... Sorry, my poor brain is a little bit ... I'm afraid I missed a part of your thought, what was the question exactly, why would that be concerning for neuroeconomics that we have the ... Sorry, I'm a bit-

Speaker 3: No, worries. I'll try and be clear. The premise of the research is that there are certain recognizable patterns in terms of the, let's say risk behavior and what we see from-

Prof. Elise P: But this is not a premise, just to be clear, sorry about the scientific approach.

Speaker 3: Sure.

Prof. Elise P: This is not a premise. Basically, the way I proceed so start by running sessions in the lab precisely to identify, to see whether there is a pattern or not. There's no premise about even pattern. When a pattern emerges in the lab, then we flesh out what's going on with using the approach, what I just tried to describe today but it's not a premise that there is a pattern. The pattern emerges from the lab experiment that we run at the first stage in every study.

Speaker 3: Okay, cool. Then perhaps I'll change my question a little bit in the sense that, do you see that pattern being very consistent or as we see in the second example where exposure to certain behavior changes those patterns. My question is then how consistent is the patterns across cultures and communities and across time. Do you have any thoughts on that?

Prof. Elise P: That's a good question, so you're asking me about can we extrapolate when we observe a given pattern? Like he one hear, to use your example, so this stuff here we observe it but can we extrapolate to different populations, environment. That's a very good question and to be honest with you we have to be cautious. Maybe I should tell that to myself a little bit more, refraining from extrapolating. It's a very good point because truth be told we don't know. That's a very good example actually because this pattern was identified in the lab meaning by the way not in the field in the lab with students as subjects.

You're right that it's probably a good idea to be a little cautious before inferring that since it emerges with students and assuming that student brain is not dramatically different from the brains of real traders, then we can think that the same will apply for the practitioners in the field. That's a kind of ... You're right actually there's ... In essence, you are right with the word premise. You're right, it is a premise, we do that.

In that sense, the premise is that we can the brains of the students and the practitioners are similar, be careful, are similar in that for this particular aspect. You know what I mean? Because obviously, they're very different in many respects but for the pattern that we are isolating we make the assumption that they are similar. You're right but it's-

Richard D: Okay, we should still have time for a couple of more questions, there's one just done here.

Speaker 4: My interest is in the practical application of your insight. Assume today that you're in the bank across the road and you enter into the trading area. How or what it is that you put up here be of practical application to the bank and to that area of the bank?

Prof. Elise P: For this example here or for the previous one? For this one or for this one? This one? To implement this? That's what I said. I would suggest to ensure that traders are not left in a given function for prolonged period of time. Now how to implement this in practice, I'm not a consultant, so basically I say this to the management and then they do whatever they want about it because I'm not going to pretend that I would know how to implement it and I would hate to say anything that I don't feel that I have a good mastery about.

My answer is quite generic but it's deliberate, very deliberate actually because to implement this simple idea, well requires all the knowledge that management has about a given organization and by the way, a related point to answer your question. The implementation of this is going to be clearly organisation specific. What you're going to do in a given bank, I don't know you want to do it… you're not going to be ...

Surely, you're not going to implement it in the same fashion in a different bank. It has to be organisation specific. So, this is to say I cannot give a specific recipe. It has to be done in close collaboration with management and so I don't ... sorry, I don't have this very specific answer to your question.

Richard D: We have another question just down in front of you.

Speaker 5: Hi, thank you. In your research, for example on the steam roller scenario. Did you consider other factors separate from the individual decision making. For example, if I were to suggest there may be a steamroller regulatory authority, who issues steamroller licenses that require steamroller operators not to run over penny pickers?

Prof. Elise P: That's a good point. Absolutely, you're right and the answer is no, I did not try to isolate this specific aspect of real world finance and I agree it's an interesting one, absolutely. In the same vein something that I am deliberately excluded from my framework because it's important to have a controlled setting so try to simplify as much as possible. You're going to isolate an aspect of a situation and you're going to exclude many others.

I isolated the individual as you rightly said, the individual aspect and I completely left into the side deliberately all the, sort of how do you call this? The interactive aspect, which I believe is very important in finance. Like if I see that the others are doing it, are picking pennies so for me it becomes even more sort of tempting to do it and blah, blah, blah. The social aspect of it, social in a broad sense. This is not something that I have studied in my research because again isolating the individual aspect is already sufficiently a mess like that no need to add more confounding factors, but you're right that this is the kind of things that could be done and it is an important aspect, yeah.

Richard D: Okay, there's someone down here on the third row from the front, whose been waiting for a while, if we could hear from you now?

Speaker 6: Thank you. Hi, I was wondering what do you think neuroeconomics can tell us about why people are so disinterested in their finances and in particular their retirement earning?

Prof. Elise P: That's a very good question. That's actually a very good question about. Yeah, so here I suppose to confirm you're referring specific to a lack of savings, right?

Speaker 6: Yes.

Prof. Elise P: Yes, so two things actually. They are two different things. Financial illiteracy is unfortunately extremely widespread and I believe it is part of the issue. People are just I think the average household is probably quite clueless in terms of how to use financial tools to save for later and kind of total logical and so I'm sorry but I believe it's an extremely important factor to bear in mind financial illiteracy, so that would be I think the number one culprit.

You're talking about interest, being interested in. I guess on this we have to be a little bit careful because again I agree with you. I guess we're on the same page. I was telling you about financial illiteracy that would be an explanation for the lack of interest. Having said that there is some solid evidence from behavioural economics that there seems to be an additional factor, which is very much related to the self-control problem. That perhaps we have a little bit over-emphasized the lack of interest.

Again, I agree with you it exists but perhaps we have a little bit over-emphasized it because it seems that there are many households that would like to save actually. So, they're not disinterested. If anything, they're very keen to but it's just that the ... it's a self-control issue. In the US in particular to be honest with you, I know much better the US setting than the Australian one, so I'm talking about what I know. In the US, clearly the self-control issue is an important explanation.

Just to summarize on this. We have to be a little bit careful because it seemingly like disinterest like I feel like can hide something perhaps a little deeper, which is this self-control plague. Does that sense? Does that answer your question?

Richard D: Ladies and gentlemen, I think that brings us to the end of the day. I'd like to very much thank Elise for her interesting presentation. Thank you very much for that.

Prof. Elise P: Thank you very much Richard.

Richard D: This is our final Learn@Lunch for the year but we'll be returning in 2019 with a fresh new series of lunchtime presentations. Could I also ask that you visit, if you haven't already, the UNSW alumni website. You can, if you wish, download today's lecture as a podcast or you may wish to decide to sign up and stay in touch for updates from us including next year's program when it's announced. Thanks very much for coming today, spending an hour or so with us and we all hope you enjoy the rest of your day. Thank you.