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Neuroeconomics: Economists perhaps need brains

Neuroeconomics Economists perhaps need brains
Behavioural economics has challenged traditional economics theory. It uses the insights from psychology to develop more realistic models of individual decision making. These models can better explain why people often do things that are not in their best interests.
Neuroeconomics, moreover, takes one step further to study how we make decision by examining the chemical process happening in the brain. Early success in neuroeconomics lies in game theory. One of the most popular examples is the “ultimate game”. In this game, one player proposes how to divide the sum of money between himself/herself and a second player. The second player can either accept or reject the offer. If s/he rejects it, neither gets a penny.

Traditional economic theory predicts that as long as the first player offers the second any money at all the proposal will be accepted because the second player prefers something (accept the division) to nothing (reject the division). However, behavioural economists found that in the experiments the second player often rejects low offers. It suggests that perhaps it is to punish the first player for dividing the money in an unfair way.

Neuroeconomics further tried to explain this irrational behaviour. Individuals are expected to answer economic questions while blood flows in the brain are monitored in order to see which part of brain is active while decisions are made. They found that rejecting a low offer in the ultimatum game tended to be associated with high levels of activity in the dorsal stratium, a part of the brain that is involved in reward and punishment decisions. This provides stronger support to behavioural economics.

Neuroeconomics
Besides the ultimate game neuroeconomics has focused on broader issues such as risk-taking behavior, altruistic behavior, addiction, etc. There is also growing interest in new evidence from neuroscience that tentatively suggests that there are two competing neural systems in the brain for decision-making. For example, in the study of addiction behavior, according to the two competing neural systems, choices for delayed outcomes are related to the prefrontal cortex (i.e., the “executive system”) and choices for immediate outcomes are related to the limbic brain regions (i.e., the “impulsive system”). This evidence has provided us a better understanding in our decision making.

However, this is not all what neuroscience could offer economics. More recent neuroeconomic studies have focused on how social, economic, and environmental factors link to brain function and how these changes in brain function affect our decision making. Finding these links would contribute substantially to shaping more effective public policies.

References

  1. “Do economists need brains?” 2008. The Economist http://www.economist.com/node/11785391
  2. Krajbich, I. and Dean, M. (2015). “How can neuroscience inform economics?”. Current Opinion in Behavioral Sciences, Vol. 5, Pages 51–57
  3. Bickel, W. K., Miller, M. L., Yi, R., Kowal, B. P., Lindquist, D. M., and Pitcock, J. A. (2007). “Behavioral and Neuroeconomics of Drug Addiction: Competing Neural Systems and Temporal Discounting Processes”. Drug Alcohol Depend.; 90(Suppl 1): S85–S91.

Author: Ming-Jin Jiang

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