ECON 398

Next Tuesday we will discuss the Introduction and CH.1 from the text.

 

What is Neuroeconomics?

 

 

Comments

[Austin Hay]

The reason why this field of study is expanding so rapidly makes sense. We have the technology to observe some brain activity in these experiments to spark more questions than answers. But I don't know what these answers will look like.

The author at one point speaks about an experiment where it was hypothesized that a "non-normative pattern of cooperation has its origin in circuits of the prefrontal cortex." It's fascinating that we can link a physical part of the brain to a phenomenon that we observe in people's social behavior. As technology progresses it will be interesting to see how/if economics textbooks will change because, as quoted in the book, the assumptions of "the standard economic model...are in direct violation of even the most basic facts about human behavior."

[Kasey Cannon]

I completely agree with Austin's comment. It is absolutely fascinating how technology has changed so many different aspects of life. It makes perfect sense why two subjects, neuroscience and economics, would pair so well together. I am very excited to see how this new field of study will change the field of economics in general over the next few years.

The section in Chapter 1 about the dopaminergic reward prediction error (DRPE) hypothesis reminded me of a reading for Econ 280 called "The Rise and Fall of Development Economics." In this paper, the authors talked about how economists in the 1950's had a difficult time expressing their ideas on high development theory in tightly, specified models simply because they did not know how to. Similar to the problems the economists in the 1950's faced, neuroeconomics is a very new, unexplored field of study and may require some setbacks or complications before it can be put into standard economic models. However, in the end, I believe that neuroeconomics will give incredible insight into people's decision-making and social behaviors.

[Lizz Platt]

The author began with an explanation of the merger between economics and neuroscience to better understand individual behavior. This combination appears to be a great mixture of human behavior and scientific proof of reasoning. Many people discredit the social sciences due to their lack of cause and effect or clinical research. However, a balance between economics and neuroscience may provide the “concrete” evidence people need to better understand society. It leads me to wonder what other fields of study can utilize the knowledge available through neuroscience. Personally, I feel policy-making can greatly benefit from the paring of neuroscience and economics. The DRPE hypothesis, in particular, focuses on rewards that are attractive to the decision-making process. With the ability to better understand human behavior, policies in education or social programs can better capture the beneficial rewards and remove the disadvantageous parts. The research can be used to better each nation depending on their citizen’s rewards and predictions. Overall, neuroeconomics has the potential to make a substantial impact on society’s welfare.

[Matt Kinderman]

As I read this introduction to Nueroeconomics, I felt like I was in agreement with many of the ideas but slightly uneasy about it. As a senior Economics major who sat through the torturous class that is intermediate microeconomic theory, it is frustrating to think of the notion that many of the models are useless. Perhaps they are not useless but only work under a strict set of circumstances that don’t actually occur in the real world. At least, that’s the pessimistic way to think about it. There are troubling weaknesses in economic theory; mainly that economic modeling should not have such large discrepancies from the reality of human decision making. For example, I don’t think it’s sufficient to say someone is irrational because they behave “intransitively” between three items. I understand that by definition it is an irrational action, but writing off normal human behaviors that we are trying to model makes for very weak models overall. When viewing Nueroeconomics as strengthening/developing and not undermining modern economics, the field becomes much more encouraging and exciting. Maybe it would be more healthy if other disciplines re-evaluated themselves for improvement in the same way that economics is now.

Although Nueroeconomics seems to work against much of revealed preference theory and the mathematical approach to economics, I feel like the work of Paul Samuelson is important to note. He, like modern nueroeconomists, challenged the status quo and attempted to explain actual decisions that are observed in an analytical framework. Hopefully, Nueroeconomics will take his work a step further with what can be found through new technological developments and either refine existing models, develop new ones, or help us understand why these decisions cannot be modeled.

[Patrick McCarron]

I found the section on rewards and the brain to be particularly interesting. The textbook mentions that the human brain developed a rewards system for food drinks, and ornaments—all entities necessary for survival and held to high cultural value—long before humans even used money as a means for trade. In general, this makes me wonder: have we been tricked to place a distorted value on money, just because our brains adapted to it as some commodity or source of pleasure necessary for survival? And how would neuroeconomics change if we evolved enough to assign the “appropriate” amount of pleasure to money?

[Michael Fitzgerald]

I believe that neuroeconomics is a discipline within economics that serves legitimize, or possibly, the work of behavioral economists. As economics is a study of human behavior and decision making it is only logical that advancements in neuroscience should be important to advancements in economics. In economics there are so many assumptions based on what is believed to be normative human behavior. However, it is also commonly understood by economists, who use these assumptions, that none of them always hold. The reason that they do not hold is because humans do not always make logical decisions. It is important for economists to study the decisions of people, instead of normative, logical decisions. This is why including neuroscience in the study of economics is so important. If economists could understand that science behind why humans make certain decisions, then it would be much more likely that they would produce models that reflect the true nature of the world instead of how it would work if every person was “rational.”

The one part of the chapter I was a bit confused about was the way it was described that the two disciplines, economics and neuroscience work to benefit each other. I can definitely see economists paying attention to neuroscientific work, but I do not see it happening quite as often in the other direction.

[Katherine Hodges]

The introduction and the beginning of chapter 1 repeatedly states that the field of neuroeconomics is an alternative to neoclassical/revealed preferences. However, I wonder if they are actually incompatible? When I was reading the chapter, the idea that people are "irrational" because they are not consistent with their choice really stuck out to me. With the advancements in neuroscience and behavior science technology, I wonder if there is a rational explanation and function behind why choices cannot be explained by simply using a utility model. As of now, the neoclassical economists disregard the unpredictable as irrational, but if brain function can create predictable choice, would the outcomes be irrational?

The GARP discussion made me think of economics in a different way. The author described that GARP is strong because, if someone violates that axiom, there cannot be a model that lies on a single utility function to describe the behavior. This gave an easily measurable theory for rational behavior. If the axiom doesn't hold, then utility functions do not work. On the other side of the discussion, GARP is weak because it doesn't tell you much when the axiom does hold. The only information you know is that a utility function will work.

[Benjamin Bayles]

As I read I could not help but feel a bit a futile about the validity of our economic research. Obviously we have made great strides, but still so much seems to be based on imperfect models being tested with imperfect science (especially in reference to Neuroeconomics). How much can we draw from a model that is flawed if the machinery (fMRI’s and others) we are using to test the model is also flawed? I obviously agree with Herbert Simon’s point that “if one could understand how the machinery of cognition worked, one could better understand why people make the choices they do,” but I question how long it will be before we are truly able to do so. Ultimately, I feel we will need to combine the Behaviorist’s emphasis on refining psychological principals and the experimental economists emphasis on improving psychological methods to attain increasingly useful data.

[Asher]

I really enjoyed reading Matt Kinderman and Katherine Hodges’ comments. They both made an elegant and concise argument for how the “unexpected” and unintuitive decisions that people make as studied in behavioral economics, and those decisions’ further analysis in neuroeconomics, may not actually be “irrational.”

I’ll quote Matt here: “I don’t think it’s sufficient to say someone is irrational because they behave ‘intransitively’ between three items. I understand that by definition it is an irrational action, but writing off normal human behaviors that we are trying to model makes for very weak models overall.”

Katherine also put it well: “I wonder if there is a rational explanation and function behind why choices cannot be explained by simply using a utility model. As of now, the neoclassical economists disregard the unpredictable as irrational, but if brain function can create predictable choice, would the outcomes be irrational?”

I find these arguments very appealing. Why couldn’t intransitivity of choice between objects be rational, despite violating GARP?

Unfortunately, I think that those who write about “bounded rationality” are probably right: intransitivity of choice really is irrational. Anyone could invent a utility function to describe someone’s irrational behavior, and then describe it as thus being rational. Take the example of intransitivity: if I prefer an apple to and orange, a peach to an apple, and an orange to a peach, someone could come up with exogenous variables that affect the utility I derive from each of these delicious fruits (that exogenous variable could be something as intangible as framing effects that could affect the desire for one fruit over the other in an intransitive sequence, even in the exact same circumstances). Or take the idea of sunk costs: if I waste my time seeing a terrible movie just because I already purchased the ticket, classical rationality theory would say that I am irrational. But if I derive sufficient utility just from the knowledge that I am consuming a product that I had already purchased (and therefore not “wasting” my money), then it could be considered a rational behavior. The simple claim that a person chooses the option which yields the highest utility, or behaves in a way that maximizes utility, becomes a self-fulfilling prophecy. Any behavior can be arbitrarily termed as having the highest “utility” (such as accounting for sunk costs or revealing intransitive preferences).

The fact is, intransitivity of choice has been demonstrated and it does in fact violate a core tenet of classical rationality theory. This means that people—and groups of people organizing themselves in markets—do not always behave in rational ways. Macroeconomists have long recognized the significance of “animal spirits” in markets. As economists, we must reconcile this fact, and use behavioral and neuroeconomics to further our understanding of human behavior and market functioning. The good news is that there is considerable evidence that we can actually train ourselves to behave more rationally. This is, as Adam Smith would say, training our “impartial spectator” to wield more power over our “passions.”

[Madison Smith]

I think that what is great about neuroeconomics is that it is a step in the right direction towards realizing that social scientists cannot have walls up when doing their own research. If social scientists ever want to gain real understanding of the world around us, they will have to concede that there are strengths and weaknesses to all different forms of thought. Neuroeconomics is a start towards realizing that we need to talk to one another and borrow ideas and techniques in order to fill in the holes. I particularly liked when the book talked about the strengths and weaknesses to axiomatic approaches because I think that it shows that economics does have limits, yet these limits do not mean that we should forget about these axioms, nor does it mean that axioms are doomed to never improve. While neuroscience is not necessarily the solution to all of these limits, it certainly seems like the different technology and capabilities can give economists great insight in to things that we may have just been theorizing in the past. I would hope that as each field of study moves forward, sociologists, economists, psychologists, et al. will begin to read each other’s work and see what is going on from another perspective in order to create the best insights in to human behavior as we can.

[Bobby DeStefano]

As many of my classmates have already stated, I find it troubling that economist have labeled people as “irrational,” yet at the core of all economic models is the idea that people make rational choices. Not wanting to repeat what me classmates have already said, I will just say this, economist use models based on GARP, which does not show the unpredictable of human choices. Because of this it is no wonder current economic models mis-predict the action of human choices.

I also agree with Katherine’s belief that neuroeconomics is incompatible with mainstream economic thought (at least after reading the first chapter). Neuroeconomics challenges a core pillar of neoclassical/revealed preferences. I refer again to the fact that human choices are not always transitive. I will be interesting to see how this rapidly expanding field of economics with effect/change current economic models in the near future.

[Hampton Ike]

The study of neuroscience and behavior as the book point out is one that is relatively new and still in its budding phases as we gain better access to technology. The application of neuroscience and the study of behavior naturally applies itself to the study of economics, but as many of my fellow classmates have noted, the integration of the two is not easy. Many of the core underlying assumptions of economic theory and the models that guide current political and academic thought are shown not to hold in reality. The question then arises whether or not these models can still be useful and whether we can somehow adapt our models to account for more accurate depictions of choice and the actions that guide consumption and production.

The study of the human mind both technically with neuroscience and less technically so through psychology has yielded interesting findings in regards to how we make decisions. Freshman year I took Intro to political philosophy with Eduardo Velasquez where we read a book by Haidt titled "The Righteous Mind". The book dealt with the perception of rationality even within ourselves when we may truly have no idea why we believe something or decided an action. He likens the human mind to a man atop an elephant whereby the man (conscious thought) can prod and attempt to guide the elephant (subconscious/emotional) but the truth is that the elephant leads the path and the man can merely help guide the way. Haidt describes the process of decision-making; stating that people make up there minds first through instinct/gut/emotion and then only subsequently seek the rational and logical reasoning behind it in an attempt to legitimize the decision of the subconscious. The work in neuroscience and particularly in neuroeconomics deals with a similar problem in that consumers (much like in every other aspect of their lives) do not act rationally, but rather attempt to rationalize after the fact.