To Act, or Not to Act: That Is the Question

Like Hamlet, we often face tough decisions without perfect information. In Hamlet’s case, the choice was something like, “My dad was murdered. I think my uncle did it. Now he’s my stepdad. Sigh.” What’s a prince to do? Should he seek revenge? Should he rat out his uncle? Seemingly incapable of making a decision, Hamlet stuck with the default: do nothing and stew.

Maybe Hamlet had the right idea. According to Ofer H. Azar, a lecturer in the School of Management at Ben-Gurion University of the Negev in Israel, inaction may often be a prudent choice in situations where most of us feel compelled to do something.

Mr. Azar studied high-stakes decision-making—not in the boardroom, but on the soccer field, where he collected data on the attempts of professional goalies to block penalty kicks. Regularly faced with huge incentives to block penalty kicks, goalies offer a great proxy for people who routinely make quick, high-pressure decisions. Mr. Azar hoped to see just how rationally people respond to such situations. Surprisingly, he found that goalies facing penalty kicks tended to let their emotions dictate their actions—often leading to detrimental outcomes.

During a penalty kick, the goalie must stand with his heels on the goal line while an opponent kicks the ball from 12 yards away. The goalie cannot move until the opponent has kicked the ball, and there is not enough time for the goalie to watch the shot and react. Thus, goalies must make a choice about where they think the ball will be kicked before the shot is made.

Since the greatest proportion of shots end up near the center of the net, the goalie’s best defense is to stay put. The trouble is, goalies find it very difficult to stay in the middle, simply because it makes them feel they aren’t doing anything. When asked why they jump left or right when it's efficient to stay put, they explain that they would feel worse if they stayed in the middle and the shooter scored than if they had at least jumped one way or the other.

We are not all professional soccer goalies. But we may feel the compulsion to act under pressure. Even if inaction is more efficient, we may take action just so we feel good about doing something. Emotion can play a large part in our decisions, especially high-stakes decisions. Economists may need to reassess the degree to which emotions can influence decision-making. In the same article, Stanford economist Paul Romer says, “How people feel about various kinds of activities means a lot about what they decide to do. In many situations, [economists] just look at the narrow monetary payoffs and forget about the effects of preference or feelings.” To learn more about the blend of emotion and calculation that goes into our decisions, read this article from the New York Times and think about the questions below.

Discussion Questions

1. Apply this logic to high-stakes business decisions made by major corporations. When times are tough, do companies tend to want to do something rather than ride out the storm? Is that always the right decision?

2. What about playing the stock market? How much do emotions play a part in the decisions we make?

3. Identify areas in your own life where emotion plays a part in important decisions. Would the outcomes of your decisions be better if emotion did not play a part?

No Free Lunches? What About Taco Tuesday?

In the second game of the World Series, Jacoby Ellsbury's second-base steal triggered Taco Bell's "Steal a base, steal a taco" promotion. Between 2:00 PM and 5:00 PM on Tuesday, October 30, Taco Bell made good on a promise of free tacos to anyone in America.

Discussion Questions

1. As with most free stuff, the taco promotion involved some hidden costs for the would-be freeloaders. What are some of the costs associated with taking Taco Bell up on its offer? Did the promotion involve external costs (costs borne by people who were not part of the taco transaction)?

2. An ABC News article pointed out that there has been at least one stolen base in every World Series since 1990. Taco Bell must have expected to make good on the promotion. Why would a profit-maximizing business offer this type of promotion?

3. A free taco isn't exactly "lunch" when you can only get it between 2:00 PM and 5:00 PM. Why were people willing to stand (or drive) in line at odd dining hours in order to get a taco that would normally run you less than a buck?

4. Sunk costs are costs that have been incurred and cannot be recouped, such as the time it took you to get to Taco Bell before realizing there was a long line. Were people sticking out a 20-minute wait for a $1 taco because they failed to ignore sunk costs?

5. In his new book, Tyler Cowen offers the following explanation of signaling: "We signal every time we incur a cost to send a message about ourselves to the outside world." Often, the higher the cost incurred, the stronger the signal. Think of the costs people incur to signal to prospective employers that they have an MBA from Wharton, or to signal to acquaintances that they attended Game 2 of the World Series. Were people signaling their devotion to the Red Sox or, more improbably, to Taco Bell? If the tacos were truly free, would anyone be able to make a strong statement about their baseball fanaticism? Might signaling help to explain the long lines in the final days before the release of products like Apple's iPhone and Microsoft's Xbox?

O.K. Consumer: Pick Your Price

I love Radiohead. Really, love. I still remember sitting in my car in the record store parking lot with one of my best friends, listening to their fourth record, Kid A, all the way through—in awe. That record took Radiohead, and rock music in general, in an unexpected direction. And true to form, Radiohead is again doing things a little differently with their latest effort, In Rainbows, releasing October 10. But this time, the surprise isn't the music itself—it's how they plan to deliver that music to the world.

Recently freed from their ties with the record label EMI, Radiohead has decided to release their latest album in two ways: as a disc-box containing the CD, vinyl, and various Radiohead goodies—available for ₤40 (about $81)—or as a download. The interesting aspect of the download option is that you can pick your own price. $0? Fine. $80? Fine. You pay whatever you want.

To find out more, check out Shane Richmond's recent column, "How Radiohead killed the record labels," and this NPR interview with Tyler Cowen of George Mason University.

Discussion Questions

1. Why would Radiohead put itself out there like this? If past releases are any indication, there are certainly millions of consumers willing to pay normal price for a new Radiohead album. But will they pay, given the choice? Like me, some fans will pay willingly, deriving some degree of benefit from knowing that they're compensating a great band for its creative efforts. You know that feeling you get after you've given a good tip? That good feeling usually comes from visible tipping—that is, the recipient knows who you are. Paying for the download, by contrast, is anonymous. How might this affect what people actually pay?

2. I certainly wouldn’t be blogging about this album if it were $9.99 on iTunes. Even as non-fans read about this, they may be curious enough to check out the Radiohead site. They may even listen to a song or two. Maybe they'll like it enough to cough up some money for the download, or maybe they'll buy the disc-box, or a concert ticket, or a T-shirt. What is Radiohead’s marginal cost of offering one more digital download for sale; what is the marginal benefit to the band of having additional listeners? Might a broader fan base generate enough revenue to more than make up for the revenue the band forgoes by not selling downloads at a standardized price?

3. A firm engages in perfect price discrimination when it charges each consumer a price equal to his or her individual willingness to pay. How is this effort similar to price discrimination? How is it different?

4. How much will you pay? You would maximize your consumer surplus by paying nothing. But can you stomach it? Does a self-selected price of $0 bring along with it an intolerably high price in guilt? Along these lines, how will the prices paid by the dedicated fan differ from those paid by the casual observer?

Loss Aversion and the Housing Market

For many people, the pain of losing $500 outweighs the pleasure of gaining $500. As Austan Goolsbee points out in a recent New York Times column, this aversion to loss is especially acute when it comes to selling real estate. People are stubborn about selling a house for less than they paid for it. If selling at prevailing market prices means accepting a significant loss, some people refuse to sell at all, or else base pricing decisions not on what they would willingly pay to buy a similar house today, but rather on what they paid for the house when they bought it. As a result, sellers who bought houses during the peak of the housing boom will list their properties for a higher price than nearly identical homes purchased earlier on at lower prices. At worst, the strong reluctance to sell at a loss leads to a prolonged freeze in the housing market, with many homes listed for sale at prices that buyers will not pay. Since people who sell a house often go on to purchase another, loss aversion can contribute to weaker housing demand and prolong the housing slump.

The housing correction in the U.S. continues to reduce house prices in many regional markets. The correction raises the risk of a downturn in the U.S. economy. As house prices decline (other things being equal), household wealth declines, and consumption expenditures decrease. The shock to consumption spending may contribute to slower growth or even a recession. As Goolsbee points out, loss aversion in the housing market adds to the gloomy outlook for the broader economy. The reduction in housing-market transactions affects the consumption of durable goods and increases the costs associated with switching jobs. Read Goolsbee's column to find out more.

Discussion Questions

1. According to the article, what fraction of home buyers are moving within a metropolitan area? How will seller reluctance to lower prices during a housing slump affect the number of future buyers in a local housing market?

2. Suppose a beet farmer arrives at the farmers' market only to discover that other beet farmers are selling identical beets for less than he had intended to sell his own beets. He is likely to succumb to competitive forces and sell his beets at the prevailing price. Why are house sellers, unlike beet farmers, unwilling to lower their prices? Does it have to do with characteristics of the sellers or characteristics of the markets?

3. What are durable goods? Why would this type of housing-market freeze impact sales of durable goods? Why do you think the ups and downs of durable-goods sales are closely aligned with the ups and downs of the business cycle?

4. Frictional unemployment refers to the relatively short spells of unemployment associated with finding and transitioning to a new job. For example, a recent college graduate searching for her first job or a banker transitioning between jobs in different areas will be frictionally unemployed until they start at their new positions. How might a prolonged housing freeze increase frictional unemployment? To what extent might a housing freeze cause people to stay in jobs they would otherwise leave?

Paying It Forward—The Economics of Altruism

I was deep in conversation with my 14-year-old son regarding the relative costs and benefits of wearing a helmet while skateboarding. Guess which side I was on? We were driving from the Bay Area to Davis, California, for Memorial Day weekend. Deep into the task of convincing my son that the various monetary, emotional, and intellectual costs of brain surgery far outweighed the relatively minuscule cost of looking slightly uncool when wearing a helmet, I stopped to pay the toll at the Carcinas Bridge. I reached out to hand the toll taker my $4, but to my astonishment, he waved me off, saying, “The car in front of you paid.” Have you ever had that sinking feeling in your stomach when you’ve done something wrong? I was feeling exactly the opposite! I felt like I had just won some mini-lottery. It changed my whole perspective on the day. I even ignored my son's wisecracks about my having ruined his social life by imposing the helmet “law” on him.

Now, I could have attributed this event to some random act of kindness: certainly commendable, but anomalous nonetheless—except that this was the third time it had happened to me in the last 12 months. In economic terms, this doesn’t seem to add up. Why would so many people pay the toll for complete strangers with no hope of a return on their investment? How did it start? What was the incentive? Who was philanthropist zero? And what of the positive repercussions this created for the rest of the community? What other acts of kindness did this generate?

If economics is about people acting in their own self-interest, does this make sense? Maybe it makes complete sense. Perhaps people are motivated by the personal gratification they derive from their own generosity rather than the desire to make others feel good. In fact, anonymous acts of kindness allow us to imagine that we've done some amount of good that might be far in excess of reality. In that sense, $4 is a small price to pay for a momentary feeling of supreme virtue.

Thus, to some degree, acts of kindness are reciprocal—we aren't giving something for nothing. When we pick up someone else's toll or leave extra money in the parking meter, we magnanimously give up a small amount, but we potentially receive a powerful feeling of satisfaction in return. None of this is to say that the effects of this type of behavior are undeniably positive, simply that the motives involved may have more to do with self-interest than with pure altruism.

Economist Steven Landsburg offered his take on the economics of altruism a few years back in an interesting article in Reason magazine. Check it out here.

Discussion Questions

1. What happens in Vernon Smith's envelope experiment when participants are told that their actions are anonymous? What happens in the experiment when participants are told that researchers will track individual decisions?

2. In the James Cox version of Smith's envelope experiment, donated sums are automatically tripled. How does the behavior of participants change under this scenario? Why, according to Landsburg, is this evidence of something dark and disturbing about human nature?

3. What could the Cox experiment teach charitable organizations about techniques for raising money?

The Economics of Nudging

A few months ago, Aplia was acquired by Thomson Learning. Looking over my first Thomson pay stub, I noticed that the company had automatically diverted some of my earnings to their 401(k) retirement plan. Though enrolled by default, I was free to opt out. Satisfied with my enrollment, I did nothing and stayed in. Like most well-intentioned people, I want to save a sensible portion of my earnings. The trouble is, when we are left to opt in to retirement plans on our own, there's a good chance we'll never get around to it. People want to save more, but many of us never do. With automatic enrollment, our employers nudge us toward the desirable outcome.

Thomson's default enrollment policy is possible because of legislation passed by Congress and the president in 2006. This new federal law preempts state laws that don't allow companies to withhold wages without employee consent. Notice that the law doesn't take away my 401(k) choices, it just allows Thomson to present them in a different way. Rather than deciding to opt in to my company's retirement plan, I have to decide whether to opt out. I still exercise the final say.

As New York Times columnist David Leonhardt has pointed out in two recent columns, appropriately placed nudges can do more than encourage retirement saving. Leonhardt applies the economics of nudging to dieting, education, and healthcare. Read his columns to find out more (one here, and another here).

Discussion Questions

1. According to Cornell marketing professor Brian Wansink, how does the size of your plate affect the size of your appetite? How do the contents and organization of your kitchen give you cues about what and how much to eat?

2. How might antique dinnerware help people cut down on calories? In what other ways can people design and stock their kitchens to provide a nudge toward healthier decisions?

3. How did Dr. Michael Gropper's rule about the default position of hospital beds lead to a big reduction in ventilator-associated pneumonia at his San Francisco hospital?

4. How did Yale economist Justine Hastings' experiment simplify the school choice application process for parents in the Charlotte-Mecklenburg School District of North Carolina? What problems do the Medicare Part D program and the State Children's Health Insurance Program share with the school choice program in Charlotte?

5. A cue in your kitchen that nudges you toward healthier choices is one thing. State-sponsored nudges are a bit different. A program in Missouri allows compulsive gamblers to sign a blacklist that bans them from casinos. If they're caught gambling, they face arrest and confiscation of winnings. The program helps keep addicts out of casinos, but it involves state coercion. Is this type of nudge really "libertarian paternalism"?

For more on the economics of nudging and libertarian paternalism, check out Jim Holt's article in the New York Times.

(How) Are Men and Women Different?

The subject of differences between men and women has always been a touchy one. Economist Lawrence Summers stepped down last year as president of Harvard, for example, after he touched off a firestorm by speculating that the differences between the achievements of men and women in academia might be due in part to differences in ability.

Suppose we posit that men and women are completely identical in their ability: or more specifically, that the distribution of ability is not dependent on gender. Even under such circumstances, there are two reasons that we might expect different outcomes among men and women: (1) institutional factors, such as discrimination, cause a woman to obtain a lesser outcome than a man of similar ability; or (2) women, for whatever reason, make systematically different choices than men, perhaps because their preferences are systematically different.

In a forthcoming paper in the Quarterly Journal of Economics, economists Muriel Niederle and Lise Vesterlund use an experiment to test the second hypothesis. Specifically, they split participants (usually college students) into groups of two women and two men. They then offered each of them a simple task: adding up series of five two-digit numbers. After a few rounds of practice, the participants were given a choice. If they selected the "piece rate" option, they would earn $0.50 for each correct calculation they made, no matter how the others in their group performed. If they selected the "tournament" option, they would earn $2.00 for each correct calculation—but only if they had the most correct calculations in the group.

What happened? About three-quarters of the men in the experiment chose the tournament option, compared to about one-quarter of the women. Indeed, most of the men who in fact had performed worst in the group chose the tournament option, and most of the women who in fact had performed best in the group chose the piece-rate option. In other words, mistakes were made by members of both genders: the men were too competitive, and the women chose the competitive option too seldom.

Niederle and Vesterlund conclude by saying:

It is generally agreed that ability alone cannot explain the absence of women in male dominated fields. In natural settings, issues such as discrimination, the amount of time devoted to the profession, and the desire for women to raise children may provide some explanation for the choices of women. However, in this paper we have examined an environment where women and men perform equally well, and where issues of discrimination, or time spent on the job do not have any explanatory power. Nonetheless we find large gender differences in the propensity to choose competitive environments… Much may be gained if we can create environments in which high-ability women are willing to compete.

Discussion Questions

1. If Niederle and Vesterlund's conclusion is correct, does this mean that "winner-take-all" competitions are inherently discriminatory against women? Why or why not? If they are, what, if anything, should be done to correct the situation?

2. Academia is one area in which there exists intense interpersonal competition for top jobs—for example, tenured positions at top universities. Steve Levitt of the University of Chicago recently called for the elimination of the tenure system. (Greg Mankiw responded that he's not surprised that Levitt, as a winner of the prestigious John Bates Clark Medal and co-author of the bestseller Freakonomics, places a relatively low monetary value on job security.) If we accept Niederle and Versterlund's conclusion, would eliminating the tenure system result in more women in academia, or fewer?

3. Many economists, when faced with a problem that some call a "market failure," like to recast the problem as one of "missing markets." For example, Ronald Coase famously showed that the problem of externalities could be resolved by allowing the affected parties to bargain with one another. Is there any way to recast the inefficiency shown in Niederle and Versterlund's experiment—i.e., the fact that women shy away from competition while men compete too much—as a problem of missing markets? If so, what market is missing?

Would You Rather Receive $250 or an iPod?

Telling everyone else how to rationally allocate their money is a pastime enjoyed by economists and non-economists alike. The holiday season, though, always seems to bring about the same piece of advice from economists: give cash, not stuff.

The argument is compelling, at least theoretically. Which would you rather receive as a gift--$250 or an iPod costing $250? If you got the cash, you could always buy the iPod, or you could buy something you liked better. Therefore, the cash must be at least as good as the iPod. Therefore, the cash must be a better gift; QED.

There is at least some empirical support for this argument. From student surveys, economist Joel Waldfogel found that "on average, a dollar that people spend for themselves creates nearly 20 percent more satisfaction than a dollar that someone else spends on them." If this is true of the entire population, Waldfogel estimates that the "deadweight loss of Christmas"--that is, the loss of consumer satisfaction caused by misallocated Christmas gifts--is somewhere between $2 billion and $9 billion per year. (Waldfogel recently wrote a piece about this research in Slate; it was also written up in The Economist a few years ago.)

So why do people give gifts? An answer may lie in a seemingly unrelated area of economics: wages and compensation. Consider the case of Arcnet, a telecom company in New Jersey. Arcnet leases a BMW 3 series for every employee, just as a perk for working there. Why does Arcnet do this? On its website, the firm says, "Even though this is a great place to work with fabulous benefits and great people, the car is a good reason those of us who work here don't have our resumes in circulation. How many of us are ever going to drive this car working for anyone else? The car goes above and beyond anything any employer will ever do for us. We know it and appreciate it." One employee is quoted as saying, "I feel like I won the lottery!"

Now, the same logic applies to Arcnet's BMW offering as to holiday gifts. Suppose it costs $800 per month to lease a BMW 3 series and pay for the other goodies they throw in. Wouldn't Arcnet be able to retain even more workers if it just gave everyone an $800-per-month raise? Then they could lease the car if they wanted to, or get something else they liked better. Yet it's very possible that employees value a BMW more than they would value an additional $800 per month.

Economist Robert Frank suggests that the answer to this paradox may lie in something that goes against the grain of standard consumer theory: people may actually like being constrained to accept a particular gift, rather than being able to "optimally" allocate an equivalent amount of money for themselves. Why? Because sometimes it's nice to get something that your rational self knows you shouldn't choose. As Frank put it in a 1999 New York Times piece, speaking of Arcnet's BMW offer,

Perhaps you'd find it awkward to tell your Depression-era parents that you'd bought a car costing twice as much as a Toyota Camry. Or you may worry that your neighbors would think you were putting on airs if you bought yourself a new BMW. Or perhaps you've wanted to make such a purchase but your spouse insists on remodeling the kitchen instead.

In other words, you can get as a gift something that you couldn't justify buying for yourself, even though you would like to have it.

Both Waldfogel and Frank concentrate on one-way gift giving: Arcnet's employees, after all, don't get Arcnet gifts in exchange for their BMWs. And indeed, if only one person is giving a gift, then cash may very well be king. But if gifts are being exchanged, then a host of new considerations come into play.

Suppose we take Waldfogel's conclusion to heart. To do away with the feared deadweight loss of Christmas, everyone gets everyone cash. Does this make sense? In some cases, almost certainly not--consider the case of a husband and wife who write each other checks from their joint checking account. But more complex issues arise in less straightforward cases. Here are some that I've thought about. Can you think of others?

1. What about parity? If you give someone $20 and they give you $40, what does that mean? Does it in fact make you feel guilty and the other person feel insulted--something that wouldn’t happen if you’d exchanged, say, a $20 necktie for a $40 bottle of wine, both with the price tags removed? (After all, since prices vary from store to store, then in the latter case there’s a non-zero probability that you paid the same amount, even if their worth is different.)

2. What happens when gifts are exchanged more than once? Suppose last year you gave someone $20 cash and they gave you $40 cash; how much should you give them this year? Do you match their $40, or raise it? Does it become like an arms race? (And if, in equilibrium, you give each other the same amount, doesn’t that just leave everyone where they started, but worse off because of the stress and uncertainty?)

3. When non-cash gifts are given, they can be compared on multiple dimensions, making it difficult to say who gave a “more valuable” gift. One may be expensive but standard (jewelry); another might be very inexpensive but heartfelt (a framed kindergarten picture saying “World’s Best Dad”). But cash has only one dimension, making comparisons between gifts easy. Are the benefits of cash in terms of flexibility outweighed by the costs of awkward interpersonal comparisons?

A Grand Bargain?

While many Americans filled their stomachs and then emptied their wallets last week, the economic blogosphere was buzzing with the possibility that the newly elected Democratic Congress might strike a "grand bargain" with the Bush administration over the issue of Social Security reform.

The Economist suggests that an option for such a bargain would be to combine two bipartisan proposals: one by William Gale, Jonathan Gruber, and Peter Orszag that would subsidize retirement saving for low- and middle-income households, and another by Jeffrey Liebman, Maya MacGuineas, and Andrew Samwick that would reform Social Security through benefit cuts, an increase in the payroll tax cap, mandatory personal retirement accounts, and more. Mark Thoma, Andrew Samwick, and Brad DeLong, among others, have interesting comments on the matter.

Why would a Democratic takeover of Congress make such a "grand bargain" more likely? After all, President Bush's Social Security reform package flopped, even when he had a solid Republican majority in Congress.

One possible answer is that hashing out a solution to a major problem like Social Security requires that all relevant stakeholders have strong enough bargaining positions to ensure that everyone comes out of the negotiations better off than when they went in. Other successful large-scale policy changes, like welfare reform under Bill Clinton and a Republican-led Congress, have followed this pattern. By contrast, when negotiations are held between parties who do not adequately represent larger groups, agreements can break down. For example, the various conflicts in the Middle East present a number of cases in which groups that are left out of negotiations attempt to subvert the agreements that come out of those negotiations. If the Republicans had tried last year to push through Social Security reforms that were unacceptable to Democrats, such a plan would have had difficulty withstanding the test of time, as the Democrats would have tried to implement a plan of their own.

Discussion Questions

1. What kinds of transactions involve bargaining rather than market mechanisms? What principles of economics are applicable in a bargaining situation? What elements of economic theory are not?

2. Social Security reform is often called the "third rail" of American politics. (The third rail is the electrified rail of a train track, which gives anyone who touches it a nasty shock.) Why is it such a difficult problem to solve through the political process? In other words, what economic or political forces are aligned against a "grand bargain" to solve this problem?

3. Why might politicians be more willing to tackle a difficult issue when both major political parties have significant power?

4. Suppose no bargain is reached in the next few years. As the years go on, and as the Baby Boomers start to retire, do you think the likelihood of reaching a bargain in the future will increase or decrease? Why?

One of the most exciting areas of economic research in recent years has been on the subject of bargaining. If you're interested in this kind of thing, a good place to start is Al Roth's page on bargaining at Harvard.

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?