[Paleopsych] JEL: Neuroeconomics: How Neuroscience Can Inform Economics

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Neuroeconomics: How Neuroscience Can Inform Economics
Authors: Camerer, Colin; Loewenstein, George; Prelec, Drazen
Journal of Economic Literature, March 2005, vol. 43, no. 1, pp. 9-64(56)
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Abstract:
Neuroeconomics uses knowledge about brain mechanisms to inform economic 
analysis, and roots economics in biology. It opens up the "black box" of the 
brain, much as organizational economics adds detail to the theory of the firm. 
Neuroscientists use many tools— including brain imaging, behavior of patients 
with localized brain lesions, animal behavior, and recording single neuron 
activity. The key insight for economics is that the brain is composed of 
multiple systems which interact. Controlled systems ("executive function") 
interrupt automatic ones. Emotions and cognition both guide decisions. Just as 
prices and allocations emerge from the interaction of two processes—supply and 
demand— individual decisions can be modeled as the result of two (or more) 
processes interacting. Indeed, "dual-process" models of this sort are better 
rooted in neuroscientific fact, and more empirically accurate, than 
single-process models (such as utility-maximization). We discuss how brain 
evidence complicates standard assumptions about basic preference, to include 
homeostasis and other kinds of state-dependence. We also discuss applications 
to intertemporal choice, risk and decision making, and game theory. 
Intertemporal choice appears to be domain-specific and heavily influenced by 
emotion. The simplified ß-d of quasi-hyperbolic discounting is supported by 
activation in distinct regions of limbic and cortical systems. In risky 
decision, imaging data tentatively support the idea that gains and losses are 
coded separately, and that ambiguity is distinct from risk, because it 
activates fear and discomfort regions. (Ironically, lesion patients who do not 
receive fear signals in prefrontal cortex are "rationally" neutral toward 
ambiguity.) Game theory studies show the effect of brain regions implicated in 
"theory of mind", correlates of strategic skill, and effects of hormones and 
other biological variables. Finally, economics can contribute to neuroscience 
because simple rational-choice models are useful for understanding 
highly-evolved behavior like motor actions that earn rewards, and Bayesian 
integration of sensorimotor information.