Loading the player...

What are 'Neuroeconomics'?

Neuroeconomics attempts to link economics, psychology, and neuroscience to glean a better understanding of economic decision making. The fundamentals of economic theory assumed that the intricacies of the human brain would never be discovered. However, with advances in technology, neuroscience has produced methods for the analysis of brain activity. 

BREAKING DOWN 'Neuroeconomics'

Fundamental to the study of neuroeconomics is a need to fill certain gaps in conventional economic theories. Economic decision making, in the traditional sense, suggests that investors will objectively evaluate risk and react in the most rational manner. Behavioral economics has shown that human behavior does not always follow economic theory or optimize utility. Insight into the mechanisms driving individuals can help to better predict the future of economies. 

For example, history has shown the perpetuation of asset bubbles and, subsequently, financial crises. Neuroeconomics provides insight into why humans do not act to optimize utility (and behave irrationally) and avoid financial difficulty. Typically, emotions have a  profound effect on individuals' decision making. The brain often reacts more to losses than to gains, which can stimulate irrational behavior. While emotional responses are not always suboptimal, they are rarely consistent with the concept of rationality. As neuroeconomics becomes more developed, the field of study will improve understanding of the mechanisms influencing decision making. 

The Four Areas of Study for Neuroeconomics

Neuroeconomics can be broken down into four central areas of study; intertemporal choice, game theory, and decision making under risk and uncertainty. Each study identifies how humans balance their emotions and utility while facing risk and uncertainty.

Intertemporal choice is the process by which people decide what and how much to do at various times; choices made at one time influence the choices available at other times.

Game theory applies mathematical models of conflict and cooperation between rational, intelligent decision makers.

Decision making under risk and uncertainty describes the difficult position of managers who much incorporate risk into their strategy decisions, which requires information on the probability distribution of outcomes such as the expected value (or mean) of the distribution, the variance and standard deviation, and coefficient of variation.

Applications for Neuroeconomics

According to the World Economic Forum, in 2016, Professor Platt Michael Platt from the Wharton University of Pennsylvania spoke at Davos and explained that researchers at Stanford University found that they could predict the effectiveness of internet microcredit campaigns by scanning the brains of participants in a laboratory setting. Platt also suggested that the approach could be used in marketing to influence consumer behavior, for example, to encourage better choices with respect to food or health-related activities.

RELATED TERMS
  1. Decision Theory

    Decision theory is an interdisciplinary approach to determine ...
  2. Paradox of Rationality

    The paradox of rationality is the empirical observation that ...
  3. Rational Expectations Theory

    The rational expectations theory posits that individuals make ...
  4. Emotional Neutrality

    Emotional neutrality is the concept of removing greed, fear and ...
  5. Intertemporal Choice

    Intertemporal choice refers to decisions, such as spending habits, ...
  6. Behavioral Funds

    Behavioral funds are a category of mutual funds that use behavioral ...
Related Articles
  1. Managing Wealth

    The Science of Making Better Investment Decisions

    Neuroeconomics attempts to bridge neuroscience, cognitive psychology and economics in order to understand the mechanisms underlying economic decision making.
  2. Investing

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  3. Investing

    Don't Let Emotions Derail Investment Decisions

    Understanding behavioral finance can help you make better investing decisions.
  4. Small Business

    7 Ways Your Emotions Skew Your Business Decisions

    Important decisions such as making a key investment, increasing production or expanding into new lines are all clouded by human emotion. Can you stay cool under pressure?
  5. Insights

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  6. Investing

    4 Behavioral Biases And How To Avoid Them

    Here are four common common behavioral biases for traders and how to minimize their effects on your portoflio.
  7. Insights

    5 Nobel Prize-Winning Economic Theories You Should Know About

    Here are 5 prize-winning economic theories that you’ll want to be familiar with.
RELATED FAQS
  1. How does economics study human action and behavior?

    Find out why economics can be considered a deductive social science, like sociology, and how human action and behavior informs ... Read Answer >>
  2. What are some of the limitations and drawbacks of economics as a field?

    Find out why the field of economics is full of controversy. Policy decisions, political campaigns and personal finances are ... Read Answer >>
  3. What are the differences between weak, strong and semi-strong versions of the Efficient ...

    Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
  4. What is the difference between marginal utility and marginal benefit?

    Learn more about the different interpretations, uses, and implications of marginal benefit and marginal utility in economic ... Read Answer >>
  5. How do managers measure human capital?

    Learn what human capital is, how managers measure it and how managers measure human capital's return on investment to gauge ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center