What is Neuroeconomics?
Neuroeconomics tries to link economics, psychology, and neuroscience to glean a better understanding of economic decision-making. The fundamentals of economic theory assumed we would never discover the intricacies of the human mind. However, with advances in technology, neuroscience has produced methods for the analysis of brain activity.
The Difference Between Finance And Economics
Fundamental to the study of neuroeconomics is a need to fill certain gaps in conventional economic theories. Economic decision-making, based on rational choice theory, suggests that investors will objectively evaluate risk and react in the most rational manner, but treats the inner workings of the decision maker’s mind as a black box that is beyond the scope of economic inquiry. Behavioral economics breached this barrier by applying insights from psychology to cases where people do not appear to follow economic rational choice theory or optimize utility. Neuroeconomics tries to take the next step by studying the relationships between economic decisions and observable phenomena in animal or human brains. Insight into the mechanisms driving individuals can help to better predict the future of economics.
- Neuroeconomics is the application of neuroscience tools and methods to economic research.
- Neuroeconomics analyzes brain activity using advanced imagery and biochemical tests before, during, and after economic choices.
- Neuroeconomics shows links between economic activity and physiological activity in certain portions of the brain or levels of brain chemicals.
For example, history has shown the perpetuation of asset bubbles and, subsequently, financial crises. Neuroeconomics provides insight into why humans might not act to optimize utility and avoid financial difficulty. Typically, emotions profoundly influence 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 shows the potential to improve the understanding of the mechanisms influencing decision-making.
Neuroeconomics is also closely related to the field of experimental economics. Neuroeconomics research largely consists of observational studies where human or animal subjects are offered one or more sets of choices, while researchers observe, measure, and record various physiological or biochemical variables before, during, and/or after the choices are made, or directly controlled experiments where researchers chemically or electromagnetically alter some subjects’ brain function and then compare the choices made by treatment and control subjects. Neuroeconomics researchers use tools like magnetic resonance imaging (MRI) and positron emission tomography (PET) scans to observe blood flow and activity in different regions of the brain, and blood or saliva tests to measure neurotransmitter and hormone levels.
Areas of Study for Neuroeconomics
Neuroeconomics can be broken down into three central areas of study: intertemporal choice, social decision-making, and decision-making under risk and uncertainty.
Intertemporal choice is the process by which people decide what and how much to do at various times. People value economic goods differently at different times, and choices made at one point influence the choices available at others. Neuroeconomic studies in this area seek to understand how brain activity and chemistry might influence time-preference and impulsivity.
Social decision-making studies relates the results of game theory-based choices involving multiple, interacting subjects to observations of brain and neural activity. Game theory applies mathematical models of conflict and cooperation between rational, intelligent decision-makers. Neuroeconomic studies on social choice have focused on how aspects of trust, fairness, and reciprocity in social decisions relate to brain function.
Studies of decision-making under risk and uncertainty describes the process of choosing among alternatives where the outcomes are fixed, but vary according to probability distributions that may or may not be known by the decision makers. These studies look at how risk preference, aversion to risk and loss, and incomplete information over decisions are reflected in the brain and nervous system.