Why spending money is like a drug

Parts of the brain are stimulated by higher salaries, even when prices rise and purchasing power drops

Steve Connor
Tuesday 24 March 2009 01:00 GMT

Money works like a drug on the human brain – and even just the thought of earning a higher salary gives us a physical buzz, a study has found.

Scientists have discovered that thinking about cash stimulates the reward centres involved in pleasure and the higher the salary – even if it is just imagined – the greater the pleasure generated in the brain.

This may be no great surprise, but the most intriguing aspect of the research is that the findings hold true even if what we want to buy costs more, for example in times of high inflation, and our actual spending power drops.

The results of the study suggest that the human brain is innately susceptible to the illusion of wealth that money can bring. This is known in economics as "money illusion" – when people get fixated on the nominal value of money, rather than on its actual purchasing power. Some economists have proposed that people behave irrationally when it comes to wages by being happier with higher salary increases in times of high inflation than they are with lower salary rises in times of low inflation.

It has now emerged that more money really does seem to generate the feelings of reward in the brain that are also involved in irrational or addictive behaviour, even if the purchasing power of higher salaries is reduced by high inflation.

A study by Professor Armin Falk, of the University of Bonn, has found scientific support for the theory of money illusion being embedded in the human mind by examining the brain activity of 18 volunteers who took part in a series of tests involving different salary payments and prices.

The volunteers were asked to earn their "salaries" by performing a series of mental tasks on a computer. The salary rates were at two levels, with the higher level being 50 per cent greater than the lower level.

They could then spend this money on a selection of goods listed in two types of catalogue. Each catalogue was identical except that one was 50 per cent cheaper than the other.

In practice, the volunteers had the same purchasing power, irrespective of which salary they earned. But the brain scans show that the reward centres in their brains were far more active when stimulated by the idea of the higher salary.

"Intuitively, money illusion implies that an increase in income is valued positively, even when prices go up by the same amount, leaving real purchasing power unchanged," Professor Falk said.

"Economists have traditionally been sceptical about the notion of money illusion, but recent behavioural evidence has challenged this view," added Professor Falk, whose study is published in the journal Proceedings of the National Academy of Sciences.

For instance, studies have shown that people report being happier when they receive a 5 per cent increase in their salaries at a time of 4 per cent inflation, compared to a 2 per cent increase in salary at a time of low inflation.

But a limitation on these previous studies is that they rely on questionnaires rather than brain scans, which has led other economists to suggest alternative, more rational explanations. The present study sidesteps this potential flaw in the research by looking directly at the reward centres of the brain that are directly involved in making decisions, Professor Falk explained.

The scientists measured higher blood flows in regions of the brain known to be involved in the experiencing of rewards, such as the ventromedial prefrontal cortex, which lies directly behind the eyes in the front part of the brain.

"This result means that reward activation generally increases with income, but was significantly higher in situations where nominal incomes and prices were both 50 per cent higher, which supports the hypothesis that activity in the ventromedial prefrontal cortex is subject to money illusion," Professor Falk said.

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