C&B Notes

The Emerging Field of Neuroeconomics

Behavioral economics emerged as a field that tries to augment economics with psychology in order to explain gaps in rationality.  In many situations economic actors do not make the rational, that is the highest expected value, choice.  The nascent field of neuroeconomics uses sophisticated tools like MRIs to observe brain activity when individuals make choices to understand the biology of decision-making.

Neuroeconomics came into being around the turn of this century, growing out of a critique of the basic idea in economics that people are driven by rational attempts to maximize their own happiness.  A new breed of behavioral economists had noted that in reality, individual definitions of “maximize” and “happiness” seemed to vary.  Neuroeconomists added the idea that, by mapping parts of the brain doing the maximizing and the happiness-defining, they could better account for those actions.

Through experiments, researchers have shown that when people reject a low, unfairly priced offer, a part of the brain associated with disgust kicks in, but that when they view the offer as fair, a brain region linked to reasoning seems more active.  Researchers have also tackled the puzzle of “overbidding,” when people pay too much for something.  An area called the striatum, associated with rewards, is more active when people bid high in an auction because they fear losing an item, but is not as active when they think they have a good chance of winning.  So fear of losing may be key to things like overvalued stocks.  Other research has shown that decisions to be very social and involved with a group, rather than hang on the fringes, may be linked to an especially active gene for dopamine, a neurotransmitter — and that the social tendency may be inherited.

* * * * *

Neuroscience and psychology could also do with improvement, and that’s where economics comes in, says Elizabeth A. Phelps.  “I was initially skeptical,” says Phelps, a psychologist who runs a lab at the NYU neuroeconomics center.  “But the more I saw of the mathematics and its ability to tease apart and model components of complex behavior, the more I realized that psychology hadn’t been very good at that.  Economics had ways to represent theories of behavior” — the brains of people making certain choices will react in certain ways — “and this allowed us to test those theories in a rigorous way.”