Neuroeconomics
Encyclopedia
Neuroeconomics is an interdisciplinary field that seeks to explain human decision making
, the ability to process multiple alternatives and to choose an optimal course of action. It studies how economic behavior can shape our understanding of the brain, and how neuroscientific discoveries can constrain and guide models of economics. It combines research methods from neuroscience
, experimental
and behavioral economics, and cognitive
and social psychology. As research into decision-making behavior becomes increasingly computational, it has also incorporated new approaches from theoretical biology, computer science
, and mathematics
. Neuroeconomics studies decision making, by using a combination of tools from these fields so as to avoid the shortcomings that arise from a single perspective approach. In mainstream economics
, expected utility
(EU), and the concept of rational agents, are still being used. Many economic behaviors are not fully explained by these models, such as heuristics and framing
. Behavioral economics emerged to account for these anomalies by integrating social, cognitive, and emotional factors in understanding economic decisions. Neuroeconomics adds another layer by using neuroscientific methods in understanding the interplay between economic behavior and neural mechanisms. By using tools from various fields, some scholars claim that neuroeconomics offers a more integrative way of understanding decision making.
. Decision sciences such as psychology and economics usually define risk as the uncertainty about several possible outcomes when the probability of each is known. Utility maximization, first proposed by Daniel Bernoulli in 1738, is used to explain decision making under risk. The theory assumes that humans are rational
and will assess options based on the expected utility they will gain from each. Research and experience uncovered a wide range of expected utility anomalies and common patterns of behavior that are inconsistent with the principle of utility maximization. For example, the human tendency to be risk-averse or risk-seeking. Also, the tendency to overweight small probabilities and underweight large ones. Kahneman
and Tversky proposed the prospect theory
to encompass these observations and offers an alternative model. Risk preference is a central concept in decision sciences, and a useful way for exploring decision making under risk and uncertainty. Neurons participating in the decision process are sensitive to subjective risk preferences, even when available options have the same objective value. Studying this can help in dissociating the subjective value that people assign to uncertain risky events from the objective value. The neural mechanisms underlying the concept of risk preference are not fully examined. This issue is the main goal of this line of research in neuroeconomics which uses neuroimaging
technique to identify regions of the brain implicated in decision making under risk and uncertainty. The insular cortex
has been shown to activate in decisions involving high risk and uncertainty. Other areas such as the ventromedial prefrontal cortex
, and the inferior frontal gyrus
have also been shown to activate when engaging in decisions that involve risk.
s which are decisions that involve costs and benefits that are distributed over time. Intertemporal choice research studies the expected utility that humans assign to events occurring at different times. The dominant model in economics which explains it is discounted utility
(DU). DU assumes that humans have consistent time preference and will assign value to events regardless of when they occur. Similar to EU in explaining risky decision making, DU is inadequate in explaining intertemporal choice. For example, DU assumes that people who value a bar of candy today more than 2 bars tomorrow, will also value 1 bar received 100 days from now more than 2 bars received after 101 days. There is strong evidence against this last part in both humans and animals, and hyperbolic discounting
has been proposed as an alternative model. Under this model, valuations fall very rapidly for small delay periods, but then fall slowly for longer delay periods. This better explains why most people who would choose 1 candy bar now over 2 candy bars tomorrow, would, in fact, choose 2 candy bars received after 101 days rather than the 1 candy bar received after 100 days which EU assumes. Neuroeconomic research on intertemporal choice focuses on whether this behavior can be better explained by the interaction of multiple systems. The central debate is on the role of the limbic system
in intertemporal choice. The limbic system refers to the medial and orbital regions of frontal cortex, the amygdala, the insular cortex, and their subcortical counterparts, and is thought to be critical to emotional processing. Evidence has been found to support the response of these structures to both immediate and delayed rewards . The extent to which intertemporal choice is generated by multiple systems, such as the limbic system, with conflicting priorities is a debated issue within neuroeconomics, and remains an area of active research.
which attempts to mathematically capture behavior in strategic situations in which an individual's success in making choices depends on the choices of others. Psychological findings and tools from cognitive psychology and social psychology are also used. Finally, imaging techniques from neuroscience are used to observe neural activity in different brain structures. By integrating various tools and fields, theoretical models of how we make decisions in a rich, interactive environment can be advanced.
or other functional neuroimaging
tools in order to compare the roles of the different brain areas that contribute to economic decision-making. Other experiments measure ERP (event-related potential
s, or use EEG
) and MEG (magnetoencephalograms) to measure the timecourses of different brain events. Direct recordings of neuronal activity and neurotransmitter
concentrations in monkeys and in humans can also be carried out.
In addition, knowledge of brain activity can invite causal experiments in which choices are actually influenced by exogeneous causal manipulations. (This is important from the point of view of standard economic theory, because in standard theory choices only change when preferences, income, prices, or information change; so any other variable which influences choice must be interpreted in those terms.) For example, TMS (transcranial magnetic stimulation), lesions to brain areas ("the lesion method"), pharmacological interventions, and simpler exogeneous variations like cognitive load and priming can all potentially influence choices.
Some authors have demonstrated that Neuroeconomics' tools may be useful not only to describe experiments involving rewarding but may also be applied in order to describe the psychological behavior of common psychiatric syndromes involving addiction as well as delusion. (Download)
is a distinct discipline closely related to neuroeconomics. While neuroeconomics has more academic aims, since it studies the basic mechanisms of decision-making, neuromarketing is an applied field which uses neuroimaging tools for market investigations.
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
, the ability to process multiple alternatives and to choose an optimal course of action. It studies how economic behavior can shape our understanding of the brain, and how neuroscientific discoveries can constrain and guide models of economics. It combines research methods from neuroscience
Neuroscience
Neuroscience is the scientific study of the nervous system. Traditionally, neuroscience has been seen as a branch of biology. However, it is currently an interdisciplinary science that collaborates with other fields such as chemistry, computer science, engineering, linguistics, mathematics,...
, experimental
Experimental economics
Experimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic experiments usually use cash to motivate subjects, in...
and behavioral economics, and cognitive
Cognitive psychology
Cognitive psychology is a subdiscipline of psychology exploring internal mental processes.It is the study of how people perceive, remember, think, speak, and solve problems.Cognitive psychology differs from previous psychological approaches in two key ways....
and social psychology. As research into decision-making behavior becomes increasingly computational, it has also incorporated new approaches from theoretical biology, computer science
Computer science
Computer science or computing science is the study of the theoretical foundations of information and computation and of practical techniques for their implementation and application in computer systems...
, and mathematics
Mathematics
Mathematics is the study of quantity, space, structure, and change. Mathematicians seek out patterns and formulate new conjectures. Mathematicians resolve the truth or falsity of conjectures by mathematical proofs, which are arguments sufficient to convince other mathematicians of their validity...
. Neuroeconomics studies decision making, by using a combination of tools from these fields so as to avoid the shortcomings that arise from a single perspective approach. In mainstream economics
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
, expected utility
Expected utility hypothesis
In economics, game theory, and decision theory the expected utility hypothesis is a theory of utility in which "betting preferences" of people with regard to uncertain outcomes are represented by a function of the payouts , the probabilities of occurrence, risk aversion, and the different utility...
(EU), and the concept of rational agents, are still being used. Many economic behaviors are not fully explained by these models, such as heuristics and framing
Framing (social sciences)
A frame in social theory consists of a schema of interpretation — that is, a collection of anecdotes and stereotypes—that individuals rely on to understand and respond to events. In simpler terms, people build a series of mental filters through biological and cultural influences. They use these...
. Behavioral economics emerged to account for these anomalies by integrating social, cognitive, and emotional factors in understanding economic decisions. Neuroeconomics adds another layer by using neuroscientific methods in understanding the interplay between economic behavior and neural mechanisms. By using tools from various fields, some scholars claim that neuroeconomics offers a more integrative way of understanding decision making.
Decision making under risk and uncertainty
Most of our decisions are made under some conditions of riskRisk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
. Decision sciences such as psychology and economics usually define risk as the uncertainty about several possible outcomes when the probability of each is known. Utility maximization, first proposed by Daniel Bernoulli in 1738, is used to explain decision making under risk. The theory assumes that humans are rational
Rational choice theory
Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. It is the main theoretical paradigm in the currently-dominant school of microeconomics...
and will assess options based on the expected utility they will gain from each. Research and experience uncovered a wide range of expected utility anomalies and common patterns of behavior that are inconsistent with the principle of utility maximization. For example, the human tendency to be risk-averse or risk-seeking. Also, the tendency to overweight small probabilities and underweight large ones. Kahneman
Kahneman
Kahnemann, Kahneman, Kahaneman :* Avraham Kahneman* Daniel Kahneman , an Israeli psychologist and Nobel laureate in economics* Harald Kahnemann-Oppenheimer, founder of Eulama...
and Tversky proposed the prospect theory
Prospect theory
Prospect theory is a theory that describes decisions between alternatives that involve risk i.e. where the probabilities of outcomes are known. The model is descriptive: it tries to model real-life choices, rather than optimal decisions.-Model:...
to encompass these observations and offers an alternative model. Risk preference is a central concept in decision sciences, and a useful way for exploring decision making under risk and uncertainty. Neurons participating in the decision process are sensitive to subjective risk preferences, even when available options have the same objective value. Studying this can help in dissociating the subjective value that people assign to uncertain risky events from the objective value. The neural mechanisms underlying the concept of risk preference are not fully examined. This issue is the main goal of this line of research in neuroeconomics which uses neuroimaging
Neuroimaging
Neuroimaging includes the use of various techniques to either directly or indirectly image the structure, function/pharmacology of the brain...
technique to identify regions of the brain implicated in decision making under risk and uncertainty. The insular cortex
Insular cortex
In each hemisphere of the mammalian brain the insular cortex is a portion of the cerebral cortex folded deep within the lateral sulcus between the temporal lobe and the frontal lobe. The cortical area overlying it towards the lateral surface of the brain is the operculum...
has been shown to activate in decisions involving high risk and uncertainty. Other areas such as the ventromedial prefrontal cortex
Ventromedial prefrontal cortex
The ventromedial prefrontal cortex is a part of the prefrontal cortex in the mammalian brain. The ventral medial prefrontal is located in the frontal lobe and is implicated in the processing of risk, fear, and in decision making.- Anatomy :...
, and the inferior frontal gyrus
Inferior frontal gyrus
The inferior frontal gyrus is a gyrus of the frontal lobe . It is labelled gyrus frontalis inferior, its Latin name...
have also been shown to activate when engaging in decisions that involve risk.
Intertemporal choice
In addition to risk preference, another central concept in economics is intertemporal choiceIntertemporal choice
Intertemporal choice is the study of the relative value people assign to two or more payoffs at different points in time. Most choices require decision-makers to trade-off costs and benefits at different points in time. These decisions maybe about savings, work effort, education, nutrition,...
s which are decisions that involve costs and benefits that are distributed over time. Intertemporal choice research studies the expected utility that humans assign to events occurring at different times. The dominant model in economics which explains it is discounted utility
Discounted utility
Discounted utility is an economics term in which economists, accountants, underwriters, and other financial analysts include the future discounted value of a good in its present value...
(DU). DU assumes that humans have consistent time preference and will assign value to events regardless of when they occur. Similar to EU in explaining risky decision making, DU is inadequate in explaining intertemporal choice. For example, DU assumes that people who value a bar of candy today more than 2 bars tomorrow, will also value 1 bar received 100 days from now more than 2 bars received after 101 days. There is strong evidence against this last part in both humans and animals, and hyperbolic discounting
Hyperbolic discounting
In behavioral economics, hyperbolic discounting is a time-inconsistent model of discounting.Given two similar rewards, humans show a preference for one that arrives sooner rather than later. Humans are said to discount the value of the later reward, by a factor that increases with the length of the...
has been proposed as an alternative model. Under this model, valuations fall very rapidly for small delay periods, but then fall slowly for longer delay periods. This better explains why most people who would choose 1 candy bar now over 2 candy bars tomorrow, would, in fact, choose 2 candy bars received after 101 days rather than the 1 candy bar received after 100 days which EU assumes. Neuroeconomic research on intertemporal choice focuses on whether this behavior can be better explained by the interaction of multiple systems. The central debate is on the role of the limbic system
Limbic system
The limbic system is a set of brain structures including the hippocampus, amygdala, anterior thalamic nuclei, septum, limbic cortex and fornix, which seemingly support a variety of functions including emotion, behavior, long term memory, and olfaction. The term "limbic" comes from the Latin...
in intertemporal choice. The limbic system refers to the medial and orbital regions of frontal cortex, the amygdala, the insular cortex, and their subcortical counterparts, and is thought to be critical to emotional processing. Evidence has been found to support the response of these structures to both immediate and delayed rewards . The extent to which intertemporal choice is generated by multiple systems, such as the limbic system, with conflicting priorities is a debated issue within neuroeconomics, and remains an area of active research.
Social decision making
Social situations offer a useful way for understanding more complex forms of decisions, which may better approximate many of our real-life choices. The research on social decision making in neuroeconomics aims to answer the question of what do our brains choose to focus on when faced with a social situation. Understanding the neural mechanisms underlying social decision making is the central focus of this line of research. Neuroeconomics uses various tools in examining social decision making. From economics, it uses the models and tasks of game theoryGame theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
which attempts to mathematically capture behavior in strategic situations in which an individual's success in making choices depends on the choices of others. Psychological findings and tools from cognitive psychology and social psychology are also used. Finally, imaging techniques from neuroscience are used to observe neural activity in different brain structures. By integrating various tools and fields, theoretical models of how we make decisions in a rich, interactive environment can be advanced.
Methodology
Behavioral economics experiments record the subject's decision over various design parameters and use the data to generate formal models that predict performance. Neuroeconomics extends this approach by adding observation of the nervous system to the set of explanatory variables. The goal of neuroeconomics is to inform the creation and contribute another layer of data to the testable hypotheses of these models.Neural recording techniques
In neuroeconomic experiments, brain scans can be performed using fMRI, PETPositron emission tomography
Positron emission tomography is nuclear medicine imaging technique that produces a three-dimensional image or picture of functional processes in the body. The system detects pairs of gamma rays emitted indirectly by a positron-emitting radionuclide , which is introduced into the body on a...
or other functional neuroimaging
Functional neuroimaging
Functional neuroimaging is the use of neuroimaging technology to measure an aspect of brain function, often with a view to understanding the relationship between activity in certain brain areas and specific mental functions...
tools in order to compare the roles of the different brain areas that contribute to economic decision-making. Other experiments measure ERP (event-related potential
Event-related potential
An event-related potential is any measured brain response that is directly the result of a thought or perception. More formally, it is any stereotyped electrophysiological response to an internal or external stimulus....
s, or use EEG
Electroencephalography
Electroencephalography is the recording of electrical activity along the scalp. EEG measures voltage fluctuations resulting from ionic current flows within the neurons of the brain...
) and MEG (magnetoencephalograms) to measure the timecourses of different brain events. Direct recordings of neuronal activity and neurotransmitter
Neurotransmitter
Neurotransmitters are endogenous chemicals that transmit signals from a neuron to a target cell across a synapse. Neurotransmitters are packaged into synaptic vesicles clustered beneath the membrane on the presynaptic side of a synapse, and are released into the synaptic cleft, where they bind to...
concentrations in monkeys and in humans can also be carried out.
In addition, knowledge of brain activity can invite causal experiments in which choices are actually influenced by exogeneous causal manipulations. (This is important from the point of view of standard economic theory, because in standard theory choices only change when preferences, income, prices, or information change; so any other variable which influences choice must be interpreted in those terms.) For example, TMS (transcranial magnetic stimulation), lesions to brain areas ("the lesion method"), pharmacological interventions, and simpler exogeneous variations like cognitive load and priming can all potentially influence choices.
Experiments
In a typical behavioral economics experiment, a subject is asked to make a series of economic decisions. For example, a subject may be asked whether they prefer to have 45 cents or a gamble with a 50% chance of one dollar and 50% chance of nothing. The experimenter will then measure different variables in order to determine what is going on in the subject's brain as they make the decision.Some authors have demonstrated that Neuroeconomics' tools may be useful not only to describe experiments involving rewarding but may also be applied in order to describe the psychological behavior of common psychiatric syndromes involving addiction as well as delusion. (Download)
Neuroeconomic Programs
Neuroeconomics has developed into an up and coming field in graduate studies. Several universities are conducting direct research on the field, such as MIT, New York University, Duke University, and George Mason University. Furthermore, some programs actually offer a degree in Neuroeconomics. Claremont Graduate University is the first institution to offer a PhD in Neuroeconomics; it is ranked by Aashish Shah, a business school undergraduate, as one of the best Neuroeconomics institutes in the United States. Caltech now (c 2007) has a Behavioral and Social Neuroscience (BSN) PhD in either CNS or HSS, mixing economic theory, neurobiology, computational neuroscience, dynamic causal modeling and neuroscientific techniques. It is also an active research center. From 2010 onwards, the Department of Economics at the University of Zurich in Zurich/Switzerland offers a degree-awarding PhD program in Neuroeconomics. Students in this program take dedicated neuroeconomics courses and conduct research within the research groups at the Department's Laboratory for Social and Neural Systems Research (SNS-Lab). A fairly complete listing can be found on the Society for Neuroeconomics Website.Criticism
Different experts have criticized the emerging field. Example of critics have been that it is "a field that oversells itself"; or that neuroeconomic studies "misunderstand and underestimate traditional economic models".Neuromarketing
NeuromarketingNeuromarketing
Neuromarketing is a new field of marketing that studies consumers' sensorimotor, cognitive, and affective response to marketing stimuli. Researchers use technologies such as functional magnetic resonance imaging to measure changes in activity in parts of the brain, electroencephalography and...
is a distinct discipline closely related to neuroeconomics. While neuroeconomics has more academic aims, since it studies the basic mechanisms of decision-making, neuromarketing is an applied field which uses neuroimaging tools for market investigations.
Further reading
- David Krueger (2009) The Secret Language of Money, McGraw-Hill Professional. ISBN 978-0-07-162339-1 PDF
- Paul W. Glimcher; Colin CamererColin CamererColin F. Camerer is an American behavioral economist and a Robert Kirby Professor of Behavioral Finance and Economics at the California Institute of Technology ....
; Russell A. Poldrack; Ernst Fehr; Neuroeconomics: Decision Making and the Brain, Academic Press, 2008. - Colin CamererColin CamererColin F. Camerer is an American behavioral economist and a Robert Kirby Professor of Behavioral Finance and Economics at the California Institute of Technology ....
, George LoewensteinGeorge LoewensteinGeorge Loewenstein is the Herbert A. Simon Professor of Economics and Psychology in the Social and Decision Sciences Department at Carnegie Mellon University and director of the Center for Behavioral Decision Research. He is a leader in the fields of behavioural economics and...
, Drazen PrelecDrazen PrelecDrazen Prelec is a professor of management science and economics in the MIT Sloan School of Management, and a pioneer in the field of neuroeconomics....
, "Neuroeconomics: How neuroscience can inform economics", Journal of Economic LiteratureJournal of Economic LiteratureThe Journal of Economic Literature is a peer-reviewed academic journal on economy published by the American Economic Association. It was established in 1963 as the Journal of Economic Abstracts. As a review journal, it mainly features essays and reviews of recent economic theories...
, 2005 - Daniel Houser; Kevin McCabe; Neuroeconomics, Advances in Health Economics and Health Services Research v. 20, Emerald Group Publishing Limited, Bingley West Yorkshire
- Peter Kenning, Hilke Plassmann, "Brain Research Bulletin - Special Issue on NeuroEconomics", 2005
- Paul Glimcher, Decisions, Uncertainty, and the Brain: The Science of Neuroeconomics, MIT PressMIT PressThe MIT Press is a university press affiliated with the Massachusetts Institute of Technology in Cambridge, Massachusetts .-History:...
, 2003. PDF alternative source - John Cassidy, "Mind Games. What neuroeconomics tells us about money and the brain", New YorkerThe New YorkerThe New Yorker is an American magazine of reportage, commentary, criticism, essays, fiction, satire, cartoons and poetry published by Condé Nast...
, 2006 September. - Hardy-Vallée, B. (forthcoming). "Decision-making: a neuroeconomic perspective". Philosophy Compass.
External links
- Scholarpedia neuroeconomics
- The Center for Neuroeconomic Studies at Claremont Graduate UniversityClaremont Graduate UniversityClaremont Graduate University is a private, all-graduate research university located in Claremont, California, a city east of downtown Los Angeles...