The Situationist

Posts Tagged ‘Herbert Gintis’

The Situation of Neuroeconomics and Situationist Economics

Posted by The Situationist Staff on August 22, 2008

In July, The Economist had a nice article on the burgeoning field of neuroeconomics, titled “Do Economists Need Brains.” We’ve excerpted a few chunks from that article below.

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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.

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

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However, not everyone is convinced. The fiercest attack on neuroeconomics, and indeed behavioural economics, has come from two economists at Princeton University, Faruk Gul and Wolfgang Pesendorfer. In an article in 2005, “The Case for Mindless Economics”, they argued that neuroscience could not transform economics because what goes on inside the brain is irrelevant to the discipline. What matters are the decisions people take—in the jargon, their “revealed preferences”—not the process by which they reach them. For the purposes of understanding how society copes with the consequences of those decisions, the assumption of rational utility-maximisation works just fine.

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The big question now is whether the tools of neuroscience will allow economics to fulfill Edgeworth’s vision—or, if that is too much to ask, at least to be grounded in the physical reality of the brain. Studies in the first decade of neuroeconomics relied heavily on active MRI scans. Economists’ initial excitement at being able to enliven their seminars with pictures of parts of the brain lighting up in response to different experiments (so much more interesting than the usual equations) has led to a recognition of the limits of MRIs. “Curiosity about neuroscience among economists has outstripped what we have to say, for now,” admits Mr Camerer.

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Still, Mr Camerer is confident that neuroeconomics will deliver its first big breakthroughs within five years. Likewise, Mr McCabe sees growing sophistication in neuroeconomic research. For the past four years, a group of leading neuroeconomists and neuroscientists has met to refine questions about the brain and economic behaviour. Researchers trained in both neuroscience and economics are entering the field. They are asking more sophisticated questions than the first generation “spots on brains” experiments, says Mr McCabe, such as “how these spots would change with different economic variables.” He expects that within a few years neuroeconomics will have uncovered enough about the interactions between what goes on in people’s brains and the outside world to start to shape the public-policy agenda—though it is too early to say how.

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To access the whole article, click here. For a collection of related Situationist posts click here and here.

Posted in Behavioral Economics, Neuroeconomics, Public Policy | Tagged: , , , , , , , , | 2 Comments »

 
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