Neuroeconomics: sub-prime mortgages exploit a bug in our brains

This discovery has important implications. (A more recent paper by the Cohen lab extends the theory.) For starters, it locates the neural source for many of our financial errors. When we opt for a 2/28 mortgage, we are acting like experimental subjects choosing the wrong gift certificate. Because the emotional parts of our brain reliably undervalue the future - life is short and they want pleasure now - we end up delaying saving until tomorrow (and tomorrow and tomorrow.) George Loewenstein, a neuroeconomist at Carnegie Mellon University and a collaborator on the Cohen paper, thinks that understanding how we make decisions will help economists develop better public policies: "Our emotions are like programs that evolved to solve important and recurring problems in our distant past," he says. "They are not always well suited to the decisions we make in modern life. It's important to know how our emotions lead us astray so that we can design incentives and programs to help compensate for our irrational biases."