Damn emotions, why we make bad $$ decisions

So why do people take out sub-prime loans? Don't they realize that they won't be able to afford the ensuing 28 years of mortgage payments? I think a big part of the reason sub-prime loans remain so seductive, even when the financial terms are so atrocious, is that they take advantage of a dangerous flaw built into our brain. This flaw is rooted in our emotional brain, which tends to overvalue immediate gains (like a new house) at the expense of future costs (high interest rates). Our feelings are thrilled by the prospect of a new home, but can't really grapple with the long-term fiscal consequences of the decision. Our impulsivity encounters little resistance, and so we sign on the bottom line. We want the house. We'll figure out how to pay for it later.

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."