Few years ago, a team of neuroeconomists at Stanford and Carnegie Mellon investigated the neuroscience of consumer decisions. A few dozen lucky undergraduates were recruited as experimental subjects and given a generous amount of spending money. The subjects were then offered the chance to buy several different objects, from a digital voice recorder to gourmet chocolates to the latest Harry Potter book. After staring at the object for a few seconds, the students were shown the price tag. If they chose to buy the item, its cost was deducted from their pile of cash. The experiment was designed to realistically simulate the experience of a shopper.

While people were deciding whether or not to buy the products on display, the scientists were imaging the activity inside their brains. They discovered that when subjects were first exposed to the objects their nucleus accumbens (NAcc) was turned on. The NAcc is a crucial part of the dopamine reward pathway, and the intensity of its activation was a reflection of desire for the item. If the person already owned the complete Harry Potter collection, then the NAcc didn’t get too excited about the prospect of buying another copy. However, if he or she had been craving a George Foreman grill, then the NAcc showed a spike in activity whenever the item appeared.

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But then came the price tag. When the experimental subjects were exposed to the cost of the product, their insula and prefrontal cortex were activated. The insula secretes aversive feelings, and is triggered by things like nicotine withdrawal and pictures of people in pain. In general, we try to avoid anything that makes our insula excited. This includes spending money. The scientists speculate that the prefrontal cortex was activated because this area was computing the numbers, trying to figure out if the product was actually a good deal. The prefrontal cortex got most excited during the experiment when the cost of the item on display was significantly lower than normal.

By measuring the relative amount of activity in each brain region, the scientists could accurately predict the subjects’ shopping decisions. They knew which products people would buy before the people themselves did. If the insula’s negativity exceeded the positive feelings generated by the NAcc, then the subject almost always chose not to buy the item. However, if the NAcc was more active than the insula, or if the prefrontal cortex was convinced that it had found a good deal, the object proved irresistible. The sting of spending money couldn’t compete with the thrill of getting something new.

This snapshot of the “neural predictors of purchase decisions” reveals that there are two basic ways to influence consumer behavior. The first method involves increasing the activity of the NAcc, ramping up our desire for the item. (Marketing is one big ode to the dopamine reward pathway.) Consider the interior of a Costco warehouse. It’s no accident that the most covetous items are put in the most prominent places. A row of high-definition televisions surrounds the entrance. The fancy jewelry, Rolex watches, iPods and other luxury items are conspicuously placed along the corridors with the heaviest foot traffic. The goal of the retailer is to constantly prime the pleasure centers of the brain, to keep us lusting after things we don’t really need. Even though we probably won’t buy the Rolex, just looking at the fancy watch makes us more likely to buy something else.

But it’s not enough to just excite the NAcc: retailers must also inhibit the insula. This brain area is responsible for making sure we don’t get ripped off, and when it’s repeatedly assured by retail stores that low prices are “guaranteed,” or told that a certain item is on sale, or that we’re getting it for the “wholesale price,” it stops worrying so much about the price tag. These retail tactics lull our brain into buying more things, since the insula is pacified. We go broke convinced that we are saving money.

For obvious reasons, online retailers have focused on the insula. They’ve relentlessly gone after the part of the brain that worries about paying too much, taking advantage of their lower overhead costs to offer the same goods for a little bit less. (The last time I walked into a Best Buy I was amused by the number of people who would check out an item and then get out their smartphone, googling to see if the discounted television was actually a good deal.) Once consumers expect an item to be discounted, that discount no longer works its magic on the insula. Instead, we readjust our pricing expectations.

But this singular emphasis on the insula – the part of the brain that frets over cost – reveals the untapped potential awaiting a truly creative online retailer. That’s because the internet has yet to figure out a way to increase the desire of the NAcc, to make us really lust after that thing we don’t need.

Physical stores, of course, have a huge advantage in this regard. When I walk into a J.Crew store, I can feel the softness of the cashmere and try on the latest iteration of the t-shirt. (Trying stuff on triggers the endowment effect, making us more likely to buy the item.) All that tactile stimulation is a “hot” stimulus, exciting the visceral emotions in ways that a picture on a screen just can’t. It’s the difference between smelling french fries and looking at an image of them – the greasy odor is a far more powerful trigger. The smell is what makes us drool.

Right now, online retailers have yet to move past ordinary pictures and boilerplate descriptions of the product. They’re still trying to sell us with information, when it’s long been clear that emotions drive our purchase decisions. (Contrary to the neat models of microeconomics, consumers typically aren’t driven by careful considerations of price and expected utility. ) As far as I can tell, the big innovation of the past few years in online selling has been the “zoom in,” allowing people to see the t-shirt or television or couch at a more detailed level. But even this trick is extremely limited. That’s because I don’t want to see a close-up of the french fry – I want to smell it. And until I can smell that fry – until internet merchants can tickle my NAcc – they’ll always be forced to hunt for new ways to soothe the insula. And that means discounts.

Via: http://www.wired.com/wiredscience/2011/09/the-neuroscience-of-groupon/