Lotteries, poverty AND credit cards this time along with the proper social and scientific analysis :)
GeorgeLoewenstein
Remember the article Lotteries, poverty and social implications? I found this article in Scientific American : Lottery Tickets and Credit Cards: The Dangers of an Irrational Brain. It’s an interview with the researcher who’s work we commented in Lotteries, poverty and social implications. He is called George Loewenstein.
What I particularly liked about this interview is the fact that Scientific American gets away from the completely theorotical perspective of psychological research and enters the more practical aspect of science, asking George Loewenstein on his views on how his research can provide the basis for economic strategies to help the poor.
LEHRER: Have these experiments changed how you feel about the lottery? Would you advocate any changes to the way the lottery system is run?
LOEWENSTEIN: Clearly there is a demand for playing the lottery, and people seem to get something out of it; otherwise they wouldn’t keep playing. But it is well established that low income people spend a higher percentage of their income on the lottery than other income groups (with one study finding that those earning incomes less than $12,400 spend an average of $645 on lotteries each year), so the lottery ends up taxing the poor at a higher rate when it makes much more sense to tax the rich at a higher rate.
The finding from our first study, that when you make people feel poor they play more, is especially sad since playing the lottery is on average a massively losing proposition. The propensity of low income individuals to play the lottery has the perverse effect of exacerbating their poverty. Although there are no easy solutions to the problem, one obvious one would be to cease marketing and advertising that targets the poor. It probably makes sense for the state to sell lottery tickets, because otherwise they will be sold by organized crime. However, does it really make sense for the state to be inducing, through advertising, poor people to play who wouldn’t play in the absence of such inducement?
Similarly, states could promote and offer more games that appeal to wealthier players, such as Powerball, and not those popular with poorer players, such as instant scratch-off tickets. Another obvious solution, though one that is even less likely to be implemented, would be for the state to increase the payout on the tickets, and perhaps to increase the number of moderate size prizes.
Finally, a third option would be for financial institutions to issue investment instruments that have lottery-like qualities (for example, offered in small amounts, available at many convenient points of purchase, provide a small chance of a large upside) but offer a positive rate of return, providing the pleasure of playing the lottery without the steep cost. In many other countries “prize bonds” or other savings instruments are available that pay lottery winnings in place of, or in addition to, regular interest. Regulations in the United States have stymied the development of such offerings.
Freaked out lottery player
Just as I have written many times in other articles, social sciences can’t get away from their social effects no matter how hard they try. It’s good to see a scientist that, not only doesn’t try to avoid social commentary, but also has his own proposals on certain issues.
The interview then goes to talk about recent research concerning credit cards
LEHRER: In a recent paper on the neural mechanisms underlying our purchasing decisions, you speculated that the "abstract nature of credit cards" might "anaesthetize consumers against the pain of paying." How might that occur?
LOEWENSTEIN: Unlike cash, where you are turning something over (bills and coins) as you are receiving something (a good or service), with credit cards you or the store clerk simply swipes the card, which doesn’t feel like giving something up. With credit cards it is also easier to miss, or deliberately ignore, how much one is spending. (A 2001 study by Dilip Soman, a professor of marketing at the University of Toronto, suggests that that people are less likely to recall, and more likely to underestimate, how much they spent on a recent transaction when they paid by credit card than with cash.) Worse, with credit cards it is unclear whether or when you are going into debt because there is uncertainty about whether you will be able to pay for your cumulated expenditures at the end of the month. Credit cards allow people to go into debt passively, without explicitly deciding to take on the debt or feeling like they are going into debt. How many credit card users who end up with $10,000 of debt at the end of the year would have been willing, at the beginning of the year, to take out a $10,000 loan to finance those same purchases? Many people who end up massively in debt with credit cards would not have done so if they had had to make an explicit decision to go into debt.
Oh, no, no, no, no!!!
Just like Steven Pinker believes, psychology can be used to unravel things about ourselves that we can use in one way or another for the betterment of the society. No matter the angle you look at it, every political theory has been based on some psychological premises, pretty much like Euclidean geometry has been based on a set of axioms.
Until now, politicians, philosophers and common people didn’t have a standard set of methods to create and check the validity of their theories. The same happens with economics. You can base a theory upon the struggle of social classes or upon the notion of utility. However, such theories that work from a "top-down" perspective (instead of "bottom-up"), that is from a general model to the basics have a difficult time being validated. That’s why you can find so many political and economics theories, or interpretations of historical events.
Now, for the first time, psychology can provide the tools and the methods and can really become the foundation of a political or economic theory with scientific basis. I have discussed some of these matters in the articles Neurons, politics and economics and How a single neurotransmitter can provide the basis for the explanation of all social phenomena where you’ll find mentions in the fledging fields of neuroeconomics and neuropolitics, which move in the direction I described above and comments on the work of another similar minded scientist called Read Montague
Research Read Montague
The interview closes with a comment on neuroeconomics
LEHRER: You are a leading figure in neuroeconomics, a new field that attempts to merge neuroscience and economics. What do you think are some of the most successful and important findings in the field so far? And what topics do you hope neuroeconomists address in the future?
LOEWENSTEIN: Neuroeconomics is still in its infancy, and many of the existing findings are speculative or contradictory. As of the present, neuroscience has mainly been used to test existing economic, and especially behavioral economic, theories. I am unaware of new, or at least definitive, insights that have emerged from the field so far. I believe that there is a danger that the field has been oversold, and perhaps “over-bought,” leading to inevitable disappointment and disillusionment. People get very excited about any research that includes colorful pictures of the brain “lighting up”—however weak the methods or results might be. However, any progress on the research frontier that links brain activity to complex behaviors, such as economic decisions, is inherently interesting and important. Give us another five to 10 years and there will almost surely be some very exciting developments.
These are exactly my thoughts. Neural research can provide the basis for the explanation of emotion, which can provide the basis for a better economic theory. I predict that the same thing will happen with politics. After all, economy and politics go hand in hand. Politics is usually nothing more than the application of an economic theory on the current social reality. Economics and politics also shape many other things on each person and are also shaped by many things. But, by just basing our explanation on nubular ideas like utility, our theories are doomed to remain unverified and unfalsified, residing in a scientific limbo where their usefulness can neither be certified nor be cast aside.
Researchers like George Loewenstein and Read Montague with their important interdisciplinary pave the way for a new road in science.
So people, prepare yourselves for a scientific revolution!! 
