Thursday, July 24, 2008

Do Economists Need Brains?

Funny title to a serious article in The Economist. The article focuses on the emerging field of neuroeconomics. A brief definition from Wikipedia:
Neuroeconomics combines neuroscience, economics, and psychology to study how people make decisions. It looks at the role of the brain when we evaluate decisions, categorize risks and rewards, and interact with each other.
And so the magazine takes a look at the growth and direction of emerging this field. For those already familiar with this stuff, there's not a lot of new info, but it's a well-written introduction for those new to the field.
Do economists need brains?

Jul 24th 2008 | NEW YORK
From The Economist print edition

A new school of economists is controversially turning to neuroscience to improve the dismal science

FOR all the undoubted wit of their neuroscience-inspired concept album, “Heavy Mental”—songs include “Mind-Body Problem” and “All in a Nut”—The Amygdaloids are unlikely to loom large in the annals of rock and roll. Yet when the history of economics is finally written, Joseph LeDoux, the New York band’s singer-guitarist, may deserve at least a footnote. In 1996 Mr LeDoux, who by day is a professor of neuroscience at New York University, published a book, “The Emotional Brain: The Mysterious Underpinnings of Emotional Life”, that helped to inspire what is today one of the liveliest and most controversial areas of economic research: neuroeconomics.

In the late 1990s a generation of academic economists had their eyes opened by Mr LeDoux’s and other accounts of how studies of the brain using recently developed techniques such as magnetic resonance imaging (MRI) showed that different bits of the old grey matter are associated with different sorts of emotional and decision-making activity. The amygdalas are an example. Neuroscientists have shown that these almond-shaped clusters of neurons deep inside the medial temporal lobes play a key role in the formation of emotional responses such as fear.

These new neuroeconomists saw that it might be possible to move economics away from its simplified model of rational, self-interested, utility-maximising decision-making. Instead of hypothesising about Homo economicus, they could base their research on what actually goes on inside the head of Homo sapiens.

The dismal science had already been edging in that direction thanks to behavioural economics. Since the 1980s researchers in this branch of the discipline had used insights from psychology to develop more “realistic” models of individual decision-making, in which people often did things that were not in their best interests. But neuroeconomics had the potential, some believed, to go further and to embed economics in the chemical processes taking place in the brain.

Early successes for neuroeconomists came from using neuroscience to shed light on some of the apparent flaws in H. economicus noted by the behaviouralists. One much-cited example is the “ultimatum game”, in which one player proposes a division of a sum of money between himself and a second player. The other player must either accept or reject the offer. If he rejects it, neither gets a penny.

According to standard economic theory, as long as the first player offers the second any money at all, his proposal will be accepted, because the second player prefers something to nothing. In experiments, however, behavioural economists found that the second player often turned down low offers—perhaps, they suggested, to punish the first player for proposing an unfair split.

Neuroeconomists have tried to explain this seemingly irrational behaviour by using an “active MRI”. In MRIs used in medicine the patient simply lies still during the procedure; in active MRIs, participants are expected to answer economic questions while blood flows in the brain are scrutinised to see where activity is going on while decisions are made. They found that rejecting a low offer in the ultimatum game tended to be associated with high levels of activity in the dorsal stratium, a part of the brain that neuroscience suggests is involved in reward and punishment decisions, providing some support to the behavioural theories.

As well as the ultimatum game, neuroeconomists have focused on such issues as people’s reasons for trusting one another, apparently irrational risk-taking, the relative valuation of short- and long-term costs and benefits, altruistic or charitable behaviour, and addiction. Releases of dopamine, the brain’s pleasure chemical, may indicate economic utility or value, they say. There is also growing interest in new evidence from neuroscience that tentatively suggests that two conditions of the brain compete in decision-making: a cold, objective state and a hot, emotional state in which the ability to make sensible trade-offs disappears. The potential interactions between these two brain states are ideal subjects for economic modelling.

Illustration by Otto

Already, neuroeconomics is giving many economists a dopamine rush. For example, Colin Camerer of the California Institute of Technology, a leading centre of research in neuroeconomics, believes that incorporating insights from neuroscience could transform economics, by providing a much better understanding of everything from people’s reactions to advertising to decisions to go on strike.

At the same time, Mr Camerer thinks economics has the potential to improve neuroscience, for instance by introducing neuroscientists to sophisticated game theory. “The neuroscientist’s idea of a game is rock, paper, scissors, which is zero-sum, whereas economists have focused on strategic games that produce gains through collaboration.” Herbert Gintis of the Sante Fe Institute has even higher hopes that breakthroughs in neuroscience will help bring about the integration of all the behavioural sciences—economics, psychology, anthropology, sociology, political science and biology relating to human and animal behaviour—around a common, brain-based model of how people take decisions.

Read the rest of this article.

Before I add some thoughts, I want to point out that the article raises the standard objection to fMRI studies, namely that these scans are too genreralized to be useful:

A standard MRI identifies activity in too large a section of the brain to support much more than loose correlations. “Blood flow is an indirect measure of what goes on in the head, a blunt instrument,” concedes Kevin McCabe, a neuroeconomist at George Mason University. Increasingly, neuroscientists are looking for clearer answers by analysing individual neurons, which is possible only with invasive techniques—such as sticking a needle into the brain. For economists, this “involves risks that clearly outweigh the benefits,” admits Mr McCabe. Most invasive brain research is carried out on rats and monkeys which, though they have similar dopamine-based incentive systems, lack the decision-making sophistication of most humans.

OK, my thoughts on this stuff.

I'd like to see this research expand in different directions. For example, does living in a capitalist society alter the brain in a specific way, as compared, for example, to those who grow up and live in communist societies, or socialist societies, or largely Third World economies based in working the fields or other subsistence living.

It would be interesting to see if social structures and cultural practices influence the brains of those who live in specific environments. My guess would be that it does, but who knows in what ways.

For example, in the "ultimatum game," would a North Korean or a Chinese person respond differently to the divisin of money than Americans do. Or for that matter, how would an Australian aboriginal respond, or an tirbal person from the Amazonian rain forests?

These are the kinds of questions that interest me. Unfortunately, a lot of this research (at least right now) is being conducted by marketing folks from major commodity producers (figuring out better ways to sell us stuff we don't need).

1 comment:

Joris said...

cultural differences in ultimatum game experiments. It's a meta-analysis and the regional division used is very rough. There seems to be no difference in offers but, for instance, Asian responders have a higher rejection rate than US responders.

Stuff like the ultimatum game is very much an academic topic, not something marketeers are interested in (as far as I know). Much too abstract to help sell more bottles of Seven-Up (or whatever).

(The question about the effect of living in a capitalist society is an interesting one though. There are some economists how claim a capitalist economy makes you more ' socially orientated'. If you want to do well - as a producer, a supplier - in such an environment, you'll have to try and think about what other people want.)