Monday, October 02, 2006

Neuroeconomics: The Role of the Brain in Economic Decision-Making…or Why We Sometimes Make Stupid Decisions

I recently purchased tickets for a Jack Johnson concert. I’m a big fan of Jack Johnson and I was excited to get a chance to hear him live. On the night of the concert I hopped on the local train and arrived at the venue with plenty of time to spare. When the attendant asked for my tickets, I reached into my pocket and realized with horror that the tickets were gone. I searched everywhere, but to no avail. When the attendant asked me if I’d like to buy another two tickets I was offended. Why would I purchase another set of tickets? I had already paid for the initial set. I left the concert and rode the train home despondent at not seeing my favorite artist.

Economists would call this an irrational decision. Since I had already lost the tickets and could afford to pay for a replacement pair, I should have ignored the sunk costs of the old tickets and seen the concert anyway. But because I was upset about the loss of the tickets, I was unwilling to pay for the concert.

A recent article in The New Yorker by John Cassidy examines the emerging field of neuroeconomics, which examines what happens in your brain when you are faced with different types of economic decisions.

Neuroeconomists believe that different parts of the brain are responsible for different types of decision-making. When presented with enough information, the higher functioning areas of the brain take over and allow you to make rational decisions. However, when presented with too little information, lower brain functions take over leading to emotional or impulsive decisions rather than rational ones.

What does this have to do with economics? Economists have long argued that we can make economic trends or predictions because people ultimately act in rational ways when it comes to economic decisions. However, we may act irrationally in cases where we do not have enough information or in cases where there is a strong emotional component to our decision.

One example Cassidy sites is immediate gratification versus long-term gain. We all know that giving up those little impulse buys and socking that money away instead will ultimately yield a sizeable nest egg in years to come. But that is not what most people actually do. In fact, Cassidy’s article states that “half of all families end their working lives with almost no financial assets.” This would seem to fly in the face of rational economic behavior.

In fact, when researchers used Magnetic Resonance Imaging (MRI) machines to scan the brains of people making economic decisions, it became clear that the prefrontal cortex, which is responsible for higher brain functions like rational decision-making processes, was more active during some types of decisions; conversely, lower portions of the brain were active in other, more emotional types of decisions.

1. Marketing is another field that is very interested in the brain’s decision-making ability. What causes us to make impulsive or emotional decisions? Why do we decide to buy that expensive new gadget when the less expensive one would clearly do the job?

2. Behavioral economists have argued over the past few decades that psychological factors should be incorporated into economic models. Do you think neuroeconomic analysis is a complementary approach to understanding human behavior, or at odds with the behavioral approach?

3. Economists have long struggled with the notion of a "utility function." Does measuring utility neurologically make sense? Do you think that with neurological analysis we can actually find out what people's utility functions are? Why or why not?



  • At 11:27 PM, October 14, 2006, Anonymous Anonymous said…

    The idea of the rational utility maximising individual is at the heart of neoclassical theory. Once you take that out, ideas of market equilibrium start to unravel. At least that's what I think.

    Utility seems to be quite an abstract notion. I mean is utility achieved through purchasing a good or through consuming it? Especially when the utility function is what determines preferences.

  • At 10:26 PM, July 01, 2007, Blogger preparation said…

    certainly bhaviour anyalysis is a one to be thought of, however, nowadays with people's blindness' thrist for thinking to an assumption of a irrational behaviour maybe accords towarding for a happening due hence, streamming the ripples such as globalization already being passing throught the overall priviatization for at least a developing country or nation. Currently, it is more about one's psycho path like his/her religion affair thence, in order to minize the war and violence.


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