We are not going to falsify all of traditional economics, but we are going to point to a whole range of biological variables that traditionally have not been included in the analysis. In economics, that is a big change.” (Colin Camerer)
How are economic decisions processed in the brain? Why do we make certain decisions instead of others? And how do we behave in response to uncertainty and risks?
In this article, I will talk about neuroeconomics, a novel field of science that investigates decision-making processes in economics and their neural basis. Therefore, to accomplish this goal, neuroeconomics merges neuroscience, psychology, and economics, disciplines that look very distant from each other but are instead highly complementary. Heuristics, value-based judgments, biases, or decisions are explored to close the gap between an experimental-driven approach and a more theoretical perspective.
Neuroeconomics is an opportunity to think differently about economics, and decisions. Financial and business strategies would benefit the global economy by gaining insight into those neural mechanisms behind choices and behaviors.
What is neuroeconomics?
Neuroeconomics is an interdisciplinary field of study aimed at exploring decision-making processes, and how humans can evaluate different possibilities before and following a plan of action. Thus, behavioral patterns and cognitive mechanisms are investigated concerning the economy and how these processes may guide models in economics. Research from neuroscience, experimental and behavioral economics, and cognitive and social psychology is combined to examine economic choices . Besides, theoretical biology, computer science, and mathematics are also included to better understand computational approaches to decision-making behaviors. Through advances in technology and neuroimaging techniques, neuroeconomics analyzes brain processes and neurochemical tests across different stages of economic choices (e.g., pre-, -post, and during) while trying to demonstrate a connection between brain activity and its response to economic activity. Hence, useful when thinking about the business and finances because it shows evidence of those neural mechanisms underlying decision-making in the economy, attempting to predict human behavior accurately.
Filling the gap in conventional economic theories
Neuroeconomics was proposed to further develop conventional theories in economics. For example, the rational choice theory proposes that investors evaluate risks objectively and react to risk with a rational approach. However, this approach tends to minimize the role of the decision-maker and the complex process that occurs in the brain. Moreover, behavioral economics overcame this limit by introducing cases from psychology in which individuals do not show the economic rational choice theory or maximize utility. From this point, neuroeconomics aims to shed light on those neural patterns that occur in humans and that explain decisions in economics while predicting the future of economics. For example, how emotions affect decisions, or how the brain reacts to losses and gains are explored to research which factors influence the dynamic of decision-making processes. Accordingly, experimental economics is highly related to neuroeconomics, which tests, measures, and analyses physiological or biochemical factors associated with choices in human and animal models.
Intertemporal choice, social decision-making, risk and uncertainty
The field of neuroeconomics expands to several areas of study. Intertemporal choice examines how individuals make decisions (how and what) at different times. Indeed, people tend to value economic goods differently in different moments and make different choices accordingly. Thus, investigating how neural activities and chemical processes could interact to determine impulsivity and preference would be of interest when understanding their influence on decisions. Another aspect relates to social influences on decision-making. A well-known example that best describes this process is the game theory which highlights the neural process of choices made by multiple interacting individuals. Hence, based on this theory, mathematical models of conflicts and cooperation among gamers are investigated, focusing on the interplay between fairness, reciprocity, and trust in social choices and how these decisions are processed in the brain. Lastly, risks and uncertainty are common situations in which decisions are made, especially in economics. Therefore, making decisions under these circumstances means that individuals have to choose among alternatives where the outcome is not fixed but varies about a probability distribution that is mostly unknown to the decision-maker. An investigation on how the brain responds to risk preference, aversion to risk and loss, or when encountering scarce information regarding the decision to be made is explored.
“How can we make the best decision?” “How can we detect the most productive and creative area of the brain to boost outcomes?” “Why do consumers prefer one product instead of another?” “How can we support the decisions of a leader?”
Integrating neuroeconomics into economic research would represent a game-changer in business because it investigates specific brain processes underlying decision-making. In contrast to the classical economic assumption that decisions are unitary processes, neuroeconomics proves that this is not the case and that decisions are rather complex events . Thus, to enhance the accuracy of economic theories, social, cognitive, and emotional variables are taken into account to support and understand why decisions are made in a certain situation.
What does the brain reveal about economic decisions?
An interesting interview with Jonathan Cohen, co-director of the Princeton Neuroscience Institute at Princeton University, deepens the topic of neuroeconomics, highlighting how neuroscience, psychology, and economy combine to explain how economic decisions manifest in the human brain.
Based on evidence from behavioral economics, he explains that individuals may behave differently from what economic theories would predict (e.g., optimizes utility). Hence, these traditional economic models do not consider individuals in their unicity, but instead, they assume that humans would show defined behaviors when facing certain circumstances. For example, from solving local and linear problems throughout the evolutions, humans developed the prefrontal cortex, a region of the brain responsible for action planning and solving problems through optimal solutions. This means the capability to look at the present and take the best advantage when forecasting the future. Nevertheless, several aspects of the human brain remain conservative (e.g. adaptive mechanisms, or survival in response to a catastrophe), but it is still unclear which situation the “older” parts of the brain are most suitable—the same regards for the prefrontal cortex. Indeed, Jonathan Cohen explains that different parts of our brain are adapted to different types of circumstances. Still, we don't have a control structure that knows which one would be the most appropriate in any given instance. Thus, in this sense, classical economic theories would just represent an approximation of how different sites of the brain work.
For more insights about the interview with Jonathan Cohen, read here.
The role of emotions in Neuroeconomics
In economic research, the role of value has often been considered a central factor in driving choice behavior. The decision-maker is called upon to assess options and take actions accordingly. However, in neuroscience and psychology, the process that describes a circumstance's appraisal while motivating actions is called emotions. Hence, humans can “detect” what is significant from what is not through emotions. Nevertheless, the concept of emotion is complex and made of several underlying processes that can be measured and assessed. Thus, neuroeconomics aims to investigate how economic decisions (behaviors) are made and how they relate to specific brain activities. In simple words, neural systems mediate economic choices and also emotions. Hence, recent studies recognize the relevance of emotions in decision making and economic choices, although for a better understanding and in contrast to a dual-system approach that minimizes the complexity of emotions, more investigation would be needed while also considering other components and factors that characterize the study of emotions and affective neuroscience .
Moreover, while trying to understand the implications on behavior and well-being, neuroeconomics aims to define a computational and neurobiological framework that accounts for choice processes. It explains the basis of human behavior across natural and social sciences . Although humans are complex systems, how does the brain make simple choices? Contrary to what would be expected, simple choices are complex processes that involve the parallel computation of different value signals and the integration of these value signals to generate motor patterns underlying decisions . A book chapter by Rangel and Clithero (2014) published in Neuroeconomics explored how the brain computes stimulus values (i.e. measure of the expected benefit of consuming several options, and independently of the action cost to reach them) by showing evidence of how the human brain represents these stimulus values regarding even simple choices and consequently defining computational models of these processes .
Neural data to create a mathematical approach of economics
Colin Camerer, the leader in the field, defines neuroeconomics as a “specialization of behavioral economics that plans to use neural data to create a mathematical and neurally disciplined approach to the micro-foundations of economics.”
Indeed, through a variety of neuroimaging techniques, it is possible to measure non-invasively brain activities. For example, through functional magnetic resonance imaging (fMRI), measuring the hemodynamic response (i.e. blood flow) across different regions, or better through transcranial magnetic stimulation (TMS), it would be possible to look at potential “casualties” while establishing a link between certain brain areas (temporarily stimulated) and the observed behavioral pattern. Besides, psychophysical techniques can also be implemented that relies on pupil dilation, heart rate, and skin conductance measures providing useful insights and implications for economics research (e.g., detecting false information, the effects of punishments and rewards on behavior). Behavioral economics, supported by psychology, sociology, and more recent neuroeconomic findings, is one of the fastest-growing fields in economics, proposing alternative behavioral decision theories to classical approaches, including models of fairness, reciprocity, prospect theory, and models of limited iterative thinking .
In conclusion, given the importance of how neuroscience can inform economics, a research article published in the Journal of Economic Literature (2005) aimed at describing what neuroscientists do and how their research work would contribute to the understanding of human behavior, and its effect on economic analysis. Besides, the interplay between emotion, cognition, and automatic/controlled processes is also discussed, followed by a deeper consideration of potential implications for economics regarding intertemporal choice, decision-making under risk, game theory, and labor market discrimination .
To read more about how neuroscience can inform economics here.
Bitcoins, ExOs, and Neurons
In the next article, I will connect neuroeconomics with the concept of exponential organizations. Due to the emerging growth of technologies entering each aspect of our daily life, I will discuss how the brain perceives money in the era of cryptocurrency and which types of behaviors are activated in this regard. Therefore, I aim to stimulate entrepreneurs or anyone who is growing a business to gain insights from neuroeconomics while expanding the future of economics.
- Levallois, Clement; Clithero, John A.; Wouters, Paul; Smidts, Ale; Huettel, Scott A. (2012). "Translating upwards: linking the neural and social sciences via neuroeconomics." Nature Reviews Neuroscience. 13 (11): 789–797. doi:10.1038/nrn3354
- George Loewenstein, Scott Rick, and Jonathan D. Cohen. "Neuroeconomics." Annual Review of Psychology, Volume 59, 2007, Pages 647-672.
- Phelps, E. A. (2009). The study of emotion in neuroeconomics. In Neuroeconomics (pp. 233–250). Elsevier. https://doi.org/10.1016/B978-0-12-374176-9.00016-6.
- Rangel, A., & Clithero, J. A. (2014). The computation of stimulus values in simple choice. In Neuroeconomics (pp. 125–148). Elsevier.
- Wunderlich, K., Rangel, A., & O’Doherty, J. P. (2010). Economic choices can be made using only stimulus values. Proceedings of the National Academy of Sciences of the United States of America, 107(34), 15005–15010. https://doi.org/10.1073/pnas.1002258107
- Dhami, S. (2012). Editor(s). In V. S. Ramachandran (Ed.), Encyclopedia of Human Behavior(pp. 288–300). Academic Press. https://doi.org/10.1016/B978-0-12-375000-6.00143-9
- Camerer, C., Loewenstein, G., & Prelec∗, D. (n.d.). Neuroeconomics: How Neuroscience Can Inform Economics COLIN CAMERER. Neuroeconomics: How Neuroscience Can Inform Economics.
Disclaimer: The views expressed here are not those of OpenExO Inc., its members, affiliates, or associates. The content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult directly your own appropriate advisors and professionals as to those matters.
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