Neuroeconomics: brain experts now follow the money

[Cain]

I hope the thread title isn't too long. Interesting article in today's New York Times explaining the emerging study of neuroeconomics. Economists, rememember, have traditionally assumed that humans are perfectly rational (i.e. self-interested) calculating machines. The Nobel prize winners for economics this year were Tverskey and Kahanmein (sp), psychologists who conducted some ingenious experiments that seriously undermined the old assumptions in the 80s.

Now a few economists are turning to brain scans: http://www.nytimes.com/2003/06/17/sc...=all&position=

Quote:

People are efficient, rational beings who tirelessly act in their own self-interest. They make financial decisions based on reason, not emotion. And naturally, most save money for that proverbial rainy day.

Right?

Well, no. In making financial decisions, people are regularly influenced by gut feelings and intuitions. They cooperate with total strangers, gamble away the family paycheck and squander their savings on investments touted by known liars.

Such human frailties may seem far too complicated and unpredictable to fold into economic equations. But now many neuroscientists are beginning to argue that it is time to create a new field of study, called neuroeconomics.

These researchers are busy scanning the brains of people as they make economic decisions, barter, compete, cooperate, defect, punish, engage in auctions, gamble and calculate their next economic moves. Based on their understanding of how fluctuations in neurons and brain chemicals drive those behaviors, the neuroscientists are expressing their findings in differential equations and other mathematical language beloved by economists.

"This new approach, which I consider a revolution, should provide a theory of how people decide in economic and strategic situations," said Dr. Aldo Rustichini, an economics professor at the University of Minnesota. "So far, the decision process has been for economists a black box."

Dr. Jonathan D. Cohen, a professor of cognitive neuroscience at Princeton, agreed. "Most economists don't base their theories on people's actual behavior," he said. "They study idealized versions of human behavior, which they assume is optimal in achieving gains."

To explore economic decision making, researchers are scanning the brains of people as they engage in a variety of games designed by experimental economists. The exercises are intended to make people anticipate what others will do or what others will infer from the person's own actions.

The games also reveal some fundamental facts about the brain that economists are just beginning to learn and appreciate:
¶In making short-term predictions, neural systems tap into gut feelings and emotions, comparing what we know from the past with what is happening right now.
¶The brain needs a way to compare and evaluate objects, people, events, memories, internal states and the perceived needs of others so that it can make choices. It does so by assigning relative value to everything that happens. But instead of dollars and cents, the brain relies on the firing rates of a number of neurotransmitters — the chemicals, like dopamine, that transmit nerve impulses. Novelty, money, cocaine, a delicious meal and a beautiful face all activate dopamine circuits to varying degrees; exactly how much dopamine an individual generates in response to a particular reward is calibrated by past experience and by one's own biological makeup.
¶Specific brain circuits monitor how people weigh different sources of rewards or punishments and how they allocate their attention. A region called the anterior cingulate reacts when people make mistakes or perform poorly; some neuroscientists say it also registers gains and losses, financial and otherwise. A small structure called the insula detects sensations in the body. It is also involved in assessing whether to trust someone offering to sell us the Brooklyn Bridge.

Cont- see link (registration required)

[shanek]

Quote:

Originally posted by Cain
Economists, rememember, have traditionally assumed that humans are perfectly rational (i.e. self-interested) calculating machines.

Uh, no, they haven't. They have never assumed anything of the kind, and such an idea is so obviously and patently false. This is a popular mischaracterization, but it is a mischaracterization nonetheless.

What they have stated is that, while the individual's actions may be irrational, uncalculated, and unpredictable, the overall result of the collective actions of millions of humans does fall into observable and predictable patterns.

Not the same thing at all.

[Cain]

Quote:

Originally posted by shanek
[b]

Uh, no, they haven't. They have never assumed anything of the kind, and such an idea is so obviously and patently false. This is a popular mischaracterization, but it is a mischaracterization nonetheless.

*Sigh* I defined rationality as self-interest. "Perfectly" could be substituted with "extremely" or "abnormally high." It's hardly a mischaracterization and I'd suggest you consult any microeconomics text. Of course economists are aware of quirks, and the article mentions a few. But still, they insist we can brush aside this "reality" and make assumptions.

And there are plenty of well-known jokes even economists tell to poke fun at their field ("assume a can opener" is a famous punch-line).

Quote:

What they have stated is that, while the individual's actions may be irrational, uncalculated, and unpredictable, the overall result of the collective actions of millions of humans does fall into observable and predictable patterns.

Indeed. And as the article explains: "Such human frailties may seem far too complicated and unpredictable to fold into economic equations. But now many neuroscientists are beginning to argue that it is time to create a new field of study, called neuroeconomics."

[Q-Source]

Economists make use of assumptions in order to analyse a problem that otherwise would be impossible to analyse. Assumptions are a frame of reference that allow later to introduce imperfections into the system.

This is perfectly valid. Another assumptions in Economics are: there is perfect information among consumers and producers, goods are homogeneous, there is free entry to the market, etc.

None of them are realistically true, but when you change some of this assumptions to make things more real, then you can understand a problem (because you can compare an ideal state with a real one).

Q-S