Neuroeconomics

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Neuroeconomics is an interdisciplinary research program aimed at building a biological model of decision making in economic environments. It is a study into the manner in which the embodied brain enables the mind (or groups of minds) to make economic decisions.

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Why should I be aware of this?

Psychologists using brain-imaging technology found that people often made decisions that caused them needlessly to lose money and found that negative emotional states can override logical thinking. There is a growing area of research which considers psychological factors other than pure logic in individual decision-making.

By a combination of techniques from cognitive neuroscience and experimental economics it is now possible to watch neural activity in real time, observe how this activity depends on the economic environment, and test hypotheses about how the emergent mind makes economic decisions.

All about Neuroeconomics

Since the 1980s researchers have been taking insights from psychology to develop more “realistic” models of individual decision-making, in which people often did things that were not in their best interests. But neuroeconomics has the potential to go further and to embed economics in the chemical processes taking place in the brain.

Seemingly irrational behavior human economic behavior is explained by neuroeconomists by using an “active MRI”. In normal MRIs the patient is inactive during the procedure. In active MRIs, participants are expected to answer economic questions while blood flows in the brain are scrutinized to see where activity is going on while decisions are made

Scanning economic decision-making

Researchers are scanning the brains of people to explore economic decision-making. They are scanning the brains of people to see how fluctuations in neurons and brain chemicals drive behaviors which lead them to make economic decisions, barter, compete, cooperate, defect, punish, engage in auctions, gamble and calculate their next economic moves.

Based on their understanding of how fluctuations in neurons and brain chemicals drive those behaviors, the neuroscientists are expressing their findings in differential equations and other mathematical language used by economists.

The brain makes its choice by comparing and evaluating objects, people, events, memories, internal states and the perceived needs of others. It does so by assigning relative value to everything that happens and relies on the firing rates of a number of neurotransmitters — the chemicals, like dopamine, that transmit nerve impulses. Novelty, money, cocaine, a delicious meal and a beautiful face all activate dopamine circuits to varying degrees.

90 degrees

Trust is important in the economy because even large, complex economies rely largely on trust every day. When you deposit a large sum in a bank ATM, or donate money to a charity assuming it will be spent on good causes, or invest in an overseas business partner you barely know, you are trusting that your money will be safe. Studies show that simple measures of trust, like asking people “In general, do you trust people?” are highly correlated with how wealthy a society is. (The poorest countries, like many in Asia and Africa, have very low levels of trust, which reflects and tolerates corruption, prevents investment, and causes the most productive workers to emigrate.) So understanding trust in the brain may enable us to understand economic behavior from synapse to society.

References:

  • What is Neuroeconomics?
  • Do economists need brains?