The Best Fiscal Stimulus: Trust
How the potent hormone of empathy, oxytocin, is shaking up the field of economics.
The neuroeconomist Paul Zak is driving west along Interstate 10 on a gorgeous Southern California morning. As we pass emerald hillsides, glowing from recent rains, and the snow-blanketed ridges of the San Gabriel Mountains, Zak talks about how standard economics neglects the biological mechanisms of trust that underlie myriad human interactions. "Why people cooperate — why people are altruistic — is a huge question," he says. "When you think about how much of the world works on a handshake or on holding a door open for somebody in an airport, all that kind of falls through the cracks in economics."
Zak and his collaborators at Claremont Graduate University have found that oxytocin, a hormone produced in the brain that promotes human bonding, plays a powerful role in shaping how generous people are. He calls it "the moral molecule." "It's a whole different model," Zak says. "It tells us why global commerce works — because there is a motivation to reciprocate."
People release oxytocin (pronounced ok-si-toh-sun) in settings that promote feelings of trust and safety, Zak has found, and their behavior becomes more trusting and generous in return. He envisions workplaces structured to reinforce this cycle. He's so absorbed in his subject that he misses a prompt from his car's GPS unit (Zak admits to having a poor sense of direction) and finds his SUV in the wrong lane. "You're getting the whole Paul Zak driving experience," he says. As he shoulder-checks a lane change for the next exit, I think of the thousands of drivers on their morning commute all around the Los Angeles metro area who somehow manage not to hit one another.
It seems nothing short of miraculous — a perfect example of trust in action.
Eventually, we arrive in Whittier, home to the Los Angeles County Sheriff's Department training academy, where Zak has been consulting. Tall and fit, with all-American good looks, Zak, 48, cuts an arresting figure as we meet up in a conference room with Capt. Mike Parker, Lt. Reinhardt Schuerger and Sgt. Al Cobos, who are working to shift the department's internal disciplinary process away from punishment in favor of education and improved performance.
In This Issue
Lobbying doesn't usually work; fat won't kill you; and the Dead Sea doesn't need to die. Check out those stories, our cover story on oxytocin shaking up the field of economics and much more in the September-October 2010 issue of Miller-McCune magazine.
Zak met Parker a couple of years ago after speaking at a community hospital in Tarzana, in the San Fernando Valley. "We are trying to build a trust-based police force," Parker told him. "We understand you're some kind of trust expert. We want to talk to you." It was the beginning of an unusual partnership, cops and economists coming together to use a happiness hormone to build public trust.
"Without the public's trust we've failed, because we're ineffective," Parker tells us. "If they don't trust you, they won't report the crimes to you." Trust is also an issue within the department, where disciplinary infractions often result in unpaid leave — a punishment that can undermine trust between management and deputies.
Zak helped develop an alternative disciplinary system that allows erring deputies to take a range of classes in such subjects as tactical communication, anger management and money management in lieu of suspension. The program's cornerstone is the mandatory LIFE (Lieutenant's Interactive Forum for Education) class. "It's a decision-making class," Schuerger explains. "It's all training and education based. The message is, 'We trust you, we want to develop you because you're still going to be a here a year from now.'"
This alternative discipline model is deliberately intended to elicit an oxytocin response, Zak says, adding, "There's some good science behind this."
Driving back to Claremont (with a wrong turn or two en route), Zak says he has also worked with the San Diego court system and advised a well-known consulting firm (the details are still confidential) regarding real-world applications of his research. He also consults for Express Scripts, a business that manages pharmaceutical benefits.
The company's goal is to get customers to trust that their prescriptions will be sent to them in the mail. "The first year I worked with them, we spent a lot of time on the biology of trust," he says.
"This is the leading edge," Zak says. He adds, thoughtfully, "It's possible we're completely insane."
Economics as most people understand it took shape in the 20th century, when not much was understood about how the brain worked and theorists tried to describe an entire economy in purely mathematical terms. As California Institute of Technology economist Colin Camerer observes, that approach assumed for simplicity's sake that people acted like atomic particles with defined properties. Once the correct principles and data were applied, the model ought to accurately describe the economy in action.
"The goal was to get a nice, compact, mathematically parsimonious system," Camerer says. "That turned out to be very useful, particularly describing a highly aggregated system, like how a company might respond to changes in demand."
But the model assumed that people invariably made rational, self-interested decisions. "It's a kind of a caricature of a highly objective, highly rational, Mr.-Spock-meets-Martha-Stewart character, who completely knows what they want and doesn't care about anyone else," Camerer says.
This view of human nature fell short because people obviously don't always act in the rational, deliberative way that the models predict. "There's this view that's embedded in standard economics, which is that emotions are these transitory, ephemeral things that you hope don't get in the way," Camerer says. "You overcome them to make rational decisions. But the modern view is that emotions are a highly adapted, early informational system about things that are happening in the world."
Behavioral economics was one response to the limitations of the rational actor model. Emerging in the 1970s and 1980s, it drew on insights from cognitive and social psychology to provide a more realistic description of human behavior that included acknowledgment of human irrationality, Camerer says.
This "bounded rationality" was favored in economics departments at leading universities on the coasts — the so-called "saltwater schools" — while rational-choice economics was deeply embedded at the University of Chicago and other Midwestern campuses (the "freshwater schools"). The Chicago economists meanwhile became known for their antipathy toward government intervention in economic markets, a stance that gained considerable popularity.
But, in recent years, hard-core Chicago School adherents have struggled to offer a plausible explanation for how efficient markets and rational actors could give rise to the mass euphoria in the housing market that triggered the great recession. Lately, their influence has been eclipsed as economists everywhere have rediscovered the activist prescriptions of the late John Maynard Keynes, and no less a light than Judge Richard Posner, long a champion of Chicago School market-oriented economics, last year published A Failure of Capitalism: The Crisis of '08 and the Descent into Depression. And even Chicago's economics department is now home to rational-choice skeptics like Steven Levitt and Richard Thaler, one of the founders of behavioral economics.
In the years when Chicago-style economics was dominant, behavioral economists like Camerer (who earned his doctorate at the University of Chicago) might have felt like they were swimming upstream as they began to follow the example of cognitive neuroscientists, who were making creative use of new brain-scanning technology like functional magnetic resonance imaging, which allowed them to see which parts of the brain were especially active during decision-making. By the late 1990s, neuroeconomics had emerged as a distinct discipline. "Neuroeconomics is sort of an extension of behavioral economics, in which the basic level of behavior you're trying to understand is not just psychological forces like emotion or mistakes but the actual neural machinery," says Camerer, who uses fMRI scanners in his work.
This new approach promises to shift economics away from a physics-based model to a focus on biological systems, he says.
Although Zak preaches the power of markets, he strongly agrees that rational-actor models fall short. "Economists get a bad rap for doing what I call 'imaginary economics,'" he says. "You sit in your office, imagine some situation and scribble down a model. You get excited about it, ship it to your friends and publish it in a journal. It has nothing to do with any problem in the world.
"What neuroeconomics does is put human beings back in the center of economics. I can go inside the brain and measure what's happening."
There was a time when Zak might have been drawn toward standard economics. He earned his doctorate at the University of Pennsylvania, where his peers were mastering a highly mathematical/theoretical method of modeling behavior. His transformation into the Pied Piper of oxytocin arose from his love of experimentation, which he discovered while building electronics with his dad in the family's garage back in the 1970s.
His father was an engineer at the University of California, Santa Barbara, and his mother a homemaker. The only boy among four children, Zak was intellectually curious but bored at school and had no plans for college. After graduating high school, he spent a year studying accounting and managing Thom McAn shoe stores.
He finally enrolled at San Diego State University, and, taking an Econ 101 class, he did so well that the teacher steered him away from a business degree and into economics. In fulfilling that major's substantial math requirements, Zak focused on applications related to biology and started learning about neuroscience. He earned degrees in math and economics before moving to Penn in 1989 for graduate studies.
Zak found himself orphaned within the economics department after his adviser left. Making his own way, he deepened his study of biology and neurology, eventually writing his dissertation on highly mathematical models that expressed underlying biological principles.
Zak arrived in Claremont in 1995, intent on researching why levels of trust vary so widely in different countries around the world. He showed that economic growth typically lags in countries with low levels of trust. "Trust was kind of the big gun economists had been looking for to understand why countries stay rich or poor," Zak says.
A business transaction needs to satisfy both parties, he explains, and that calls for trust.
At the time, Zak suspected there was a biological basis for trust, but he didn't know what it was. In 2000, as he explored why people invest in their children, he discovered oxytocin in the animal literature on the bonding between parents and their offspring.
A fast-acting chemical messenger made in the hypothalamus, oxytocin is what stimulates uterine contractions as a mother delivers her baby. It is also released when people pet their dogs, nurse their children or have sex (some call it "the cuddle hormone"). Research chemist Vincent du Vigneaud won a Nobel Prize in 1955 for isolating and synthesizing it. Today, a synthetic form of oxytocin called pitocin is often used to induce labor in hospitals.
Oxytocin Increases Trust — Under Certain Conditions
Researchers report effects of the “trust hormone” get negated when a partner is perceived as dishonest. Read the story here:
"Oxytocin Increases Trust — Under Certain Conditions"
Scientists studying small rodents called prairie voles and their mountain-dwelling cousins, the montane voles, found big differences in the concentration of oxytocin receptors in their brains — and the concentrations seemed to coincide with behavioral differences. Gregarious (but monogamous) prairie voles had lots of receptors. There were many fewer receptors in montane voles, which tend to be promiscuous loners.
A light went on. "It occurred to me that this could be a mechanism — although it was a leap of faith — through which you might actually care about the outcome of a complete stranger," Zak says.
He wondered whether oxytocin could induce one person to invest in another in the absence of self-interest. "If so, I've found the secret sauce," he realized. He approached animal researchers about experiments to test his hypothesis, but they weren't interested in studying humans.
Fortunately, he had just won tenure. When he proposed his project to his dean, he warned that he might not publish anything for two or three years. "Go for it," the dean said. "That's why you have tenure. Take some risks."
Zak's wife, neurologist Lori Uber-Zak, was skeptical, and when he consulted an obstetrician, who was undoubtedly used to thinking of oxytocin as a "female hormone," the doctor called it "the world's stupidest idea." But Zak was undeterred. "If it was a stupid idea, it was a testably stupid idea," he says.
First, he needed a way to manipulate oxytocin levels. He hit on the idea of having subjects sniff the hormone through a pump-action inhaler. The first tests were carried out with Swiss collaborators because he hadn't yet received FDA approval to administer oxytocin in the United States. (He has since administered it to hundreds of undergraduates without any adverse effects.)
Next, he needed an experimental format to measure whether the hormone had any effect on how trusting (or trustworthy) people were. He settled on the Trust Game, devised by Vernon Smith, a behavioral economist who won the Nobel Prize in 2002, to test how generous players are when they are paired with strangers.
In Smith's version of the exercise, a player — Bob — is given $10 and paired with an anonymous stranger (Larry) online. The computer prompts Bob to give Larry any amount between zero and $10 — an amount that will automatically be tripled in Larry's account.
Larry, who also starts with $10, learns of Bob's gift and is given the opportunity to keep the money or return some or all of it.
Bob's gift measures trust, according to Smith's research, while Larry's money transfer assesses reciprocity or trustworthiness. Smith, Zak and others who have run the experiment in a variety of different settings find that about three-quarters of the players in Bob's shoes send money to the second player, and an even higher number of players like Larry return some money to the first player.
"If you don't have any trust or trustworthiness in this experiment, everyone leaves with the amount of money they got for showing up — 10 bucks," Zak says. But these experiments show that, on average, people make more than that because most people do in fact reciprocate.
The Trust Game outcomes contradict a standard economic assumption that the players should follow the Nash Equilibrium (named for John Forbes Nash, the economist and mathematician whose struggles with schizophrenia inspired the film A Beautiful Mind) and not share any of their money.
"Economists called these people irrational because they didn't play the 'optimal' Nash Equilibrium," Zak says, "and yet, these irrational people were beating John Nash, a Nobel Prize winner. That can't be irrational."
Vernon Smith showed that people are naturally more generous than decision theory would predict. But what would happen if the players' moods were enhanced by oxytocin? Zak had some of his game subjects inhale oxytocin before playing the Trust Game. Remarkably, more than twice as many people on oxytocin sent all of their money to a stranger (versus control subjects who were administered a placebo).
This is compelling evidence that oxytocin helps us to decide whom to trust and when to reciprocate, Zak says. "Civilization is dependent on oxytocin," he says. "You can't live around people you don't know intimately unless you have something that says, 'Him I can trust, and this one I can't trust.'"
In a related test, the Ultimatum Game, Bob starts with $10, while Larry has nothing. The computer prompts Bob to share some of his money, an amount that Larry can either accept or reject. But if Larry rejects the offer, both players wind up empty-handed.
In Western countries, offers of less than $3 are usually rejected; even though it's more than he had before, Larry feels getting just $3 represents an unfair split of the $10. But in Zak's tests, oxytocin-enhanced players were 80 percent more generous than those on placebo.
Zak also administered testosterone, which counteracts the effects of oxytocin, to male players in the Ultimatum Game, creating temporary "alpha males." They were 27 percent less generous than when they played the game with their normal testosterone levels. And, sensing when they were distrusted, they were also more inclined to punish those who had been ungenerous toward them.
These behavioral changes occurred below conscious awareness, Zak says. "Oxytocin and testosterone really work on these evolutionarily old areas of the brain and the peripheral nervous system — the gut and the heart — that tell us whether it feels right or not," he says.
All this is evidence for what Zak calls the HOME Circuit (for Human Oxytocin-Mediated Empathy), a neural feedback loop where oxytocin releases dopamine, the neurotransmitter associated with goal-directed behaviors, and serotonin, which promotes positive mood and reduces anxiety.
It turns out we have oxytocin receptors in different areas of our brains and elsewhere in the body, and this system has a dynamic character. In women, for example, the number of receptors waxes and wanes with the menstrual cycle. And it operates as a feedback loop. "The more you release, the more you're likely to release," he says. "The system tunes itself."
But a small number of people seem to be immune to the effects of oxytocin and don't reciprocate when others make generous gestures — they are at best selfish and at worst psychopaths. "We call them 'bastards,'" Zak says.
These people actually have high levels of oxytocin circulating in their blood because they lack the brain receptors for the hormone to bind to, Zak says. "The feedback loop is broken."
Zak acknowledges that talk of trust and generosity seems to contradict what Adam Smith had to say in The Wealth of Nations, the economists' bible, when he advocated for free markets that allowed each individual to act in his or her own self-interest. A popular interpretation of that book is that in a free market, economic interactions are all about dog-eat-dog competition — a Darwinian struggle for survival.
Zak calls The Wealth of Nations Smith's "second-best book," pointing out that the Scottish thinker had published an earlier work titled The Theory of Moral Sentiments (1759) that described how moral behavior arises naturally from social interactions and provided one of the earliest published descriptions of empathic feeling. Clearly, Smith's take on all this was more nuanced than is commonly supposed.
As an economist, Zak doesn't question the power and efficiency of markets, but he argues that economic models ought to reflect that people are motivated by altruism and reciprocity as much as naked self-interest. Many members of the economics establishment haven't taken kindly to these assertions. For example, Princeton economists Faruk Gul and Wolfgang Pesendorfer launched a caustic critique of neuroeconomists and their methodology with "The Case for Mindless Economics," a 2005 paper published in The Foundations of Positive and Normative Economics: A Handbook (edited by Andrew Caplin and Andrew Schotter).
"Economics and psychology address different questions, utilize different abstractions, and address different types of empirical evidence," they wrote. "Neuroscience evidence cannot refute economic models because the latter make no assumptions and draw no conclusions about the physiology of the brain. Conversely, brain science cannot revolutionize economics because it has no vehicle for addressing the concerns of economics."
The pair also contended that the methods of standard economics are far more flexible than neuroeconomists suppose. In examining people's economic choices, it suffices to know their revealed behavior, they argued. There is no need to probe their internal decision-making process.
Zak's passion for his research (his license plate reads "OCYTOSN"), has led to a good deal of attention in the popular press over the past seven years. In 2005, he made Wired.com's list of "10 Sexiest Geeks." He also writes a popular blog for the Psychology Today website. And clearly, his public advocacy of neuroeconomics has ruffled some feathers, Caltech's Colin Camerer says. "On one level, the reason why Gul and Pesendorfer were so upset was that their view is if you sit and think about things mathematically hard enough, you'll figure them out — whether it's temptation or consumer mistakes or the role of fads and fashions in consumer products," he says.
But Camerer applauds Zak's hormone research for adding an important new dimension to neuroeconomic understanding. "It's great," he says. "It's hard work, because you need to measure the hormone levels. And if you're lucky, you find a way to adjust hormone levels. It's just another part of the biological system that clearly has potentially big effects."
Zak's Center for Neuroeconomic Studies was established in 2004 in Claremont, a town 30 miles east of Los Angeles that is home to the Claremont Colleges, a consortium of five undergraduate colleges and two graduate institutions serving more than 6,000 students. The center is housed in an old bungalow where coordinator Moana Vercoe is overseeing a renovation project that includes 16 new computer stations for study subjects to play generosity games on. As she shows me around, I notice cabinets filled with syringes and rubber gloves and a refrigerated centrifuge used to spin down blood samples. "It's not a normal economist's office," she observes.
A New Zealander, Vercoe came here to research a dissertation on emotional resiliency, measuring oxytocin levels in a group of 75 women who had suffered childhood traumas. Along the way, she became Zak's first research assistant. "We do cool stuff," she says, "but we do cool stuff that matters."
Vercoe registers the new study subjects, mostly undergraduates who are paid for their participation. Curious about what they experience, I ask Zak for a sample dose of oxytocin. He pulls on latex gloves and uses a syringe to draw 40 ml from a vial and inject it into a pump inhaler.
He hands me some tissues, puts the inhaler up to a nostril and repeatedly pumps it while telling me to take deep breaths. It has a tart, earthy smell, and I cough a couple of times as an after-burn spreads in my sinuses. My oxytocin levels should start peaking in about an hour.
We continue talking, and at the 60-minute mark Zak says, "Tell me how you feel. Any different?"
"I feel relaxed," I answer. Otherwise, I don't notice anything special. I don't think I'm ready to open up my wallet and start handing money to strangers — but maybe I would. This is normal, he says. Most subjects can't tell whether they have received oxytocin or a placebo.
At a computer in an upstairs office, he cues up a video documentary showing a father talking about his toddler son who has an incurable brain tumor. As the man talks about his remaining time with his boy, the video cuts to scenes of the happy, shaven-headed youngster playing with other kids. I find it heartbreaking.
Zak uses this video to measure whether oxytocin intensifies people's emotional responses. "Women release about 25 percent more oxytocin watching that film than men do," he says, a response that makes sense from an evolutionary standpoint; by his analysis, women should be more trusting, generous and empathic, while testosterone-fueled males enforce social order and make sure that trusting people aren't exploited by non-reciprocators. Zak shares ideas like these at the National Judicial College and other gatherings of lawyers and judges. Many in the legal community hope his insights can be used to reduce criminal recidivism and promote better approaches to sentencing.
Tom Hollenhorst, an associate justice on the California Court of Appeals who serves on the center's board, is impressed by Zak's ability to draw connections from data collected across a broad range of disciplines. "Sometimes, I think he sees things that those of us who are simply ordinary people don't see," Hollenhorst says.
Judges and lawyers like Zak's work because they understand that oxytocin levels could be measured to determine a defendant's suitability for parole or rehabilitation versus incarceration, he says. "I think these tests will have tremendous forensic value," Hollenhorst adds. "Science is moving far beyond the theoretical at this point. What's beginning to emerge is a picture of usefulness."
Zak sees many opportunities to build oxytocin-releasing mechanisms into the workplace. For instance, companies that provide on-site day care for their employees will likely see greater productivity.
Some offices offer once-a-week chair massages. "It sounds squishy, but we've got the research showing it raises oxytocin," he says. Allowing employees to bring their pets to work might also be an option, because hanging out with your dog has the same effect.
To some, these oxytocin-fostering companies might sound utopian, especially given that many people have come to view business leaders as greedy, ruthless predators who exploit their employees. Zak says that perception arises from a relatively small number of companies that have rashly adopted an exploitative management style.
Ultimately, he says, the greed-is-good approach doesn't work. "Maximizing greed is a very short-term strategy," he says, pointing to the Enron debacle as a prime example. Organizations with flatter, less hierarchical management structures are actually more successful, he says.
Zak continues to generate new hypotheses to test, but the more pressing mission now, he says, is to take the findings out into the world.
"What do we do with this?" he asks. "How can we make the world more trusting, more cooperative, more generous? It's not all oxytocin. It's a much bigger brain circuit. It's the people interacting with you, it's the environment within which you interact — all those things matter. We have to peel away the layers of the onion to figure out how all those things fit together."