Pratik Das
No no, this is not biology. Nor some article on human hormone regulation and control! This is economics, more precisely one of the very least branches of economics that need your brain to be the subject of discussion! Might this sound utopian to you, it isnt. So where to begin with? Alright the technical definition, Neuroeconomics is an interdisciplinary field that seeks to explain human ability to process multiple alternatives and to choose an optimal course of action. It studies how economic behavior can shape our understanding of the brain, and how neuroscientific discoveries can constrain and guide models of economics.
Okay, simpler? Its decision making. Strategic decision making, out of all alternatives provided to you. Neuroeconomics studies decision making, by using a combination of tools from many fields so as to avoid the shortcomings that arise from a single-perspective approach. In mainstream economics, expected utility (EU), and the concept of rational agents, are still being used.
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. And thats where it all began.
And of course it has got many divisions of its own! Namely Decision making under risk and uncertainty, Loss aversion, Intertemporal choice, and Social decision making. Risk, as we study in disaster management; the long wound nitty gritty definitions is the base of the first kind. The theory assumes that humans are rational(indeed) and will assess options based on the expected utility they will gain from each. Then is Loss aversion, One interesting aspect of human decision making is a strong aversion to potential loss.
For example, the cost of losing a specific amount of money is higher than the value of gaining the same amount of money. One of the main controversies in understanding loss aversion is whether the process is driven by a single neural system that directly compares options and decides between them or whether there are competing systems, one responsible for a reasoned comparison among options and another more impulsive and emotional system driven by an aversion to potentially negative outcomes.
Intertemporal choices which are decisions that involve costs and benefits that are distributed over time. Intertemporal choice research studies the expected utility that humans assign to events occurring at different times. And finally the payoff for a particular choice is dependent not only on the decision of the individual but also on that of another individual playing the game, labelled as Social decision making.
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 offersperhaps, they suggested, to punish the first player for proposing an unfair split.
The success of neuroeconomics need not mean that behavioural economics will inevitably triumph over an economics based on rationality. Indeed, many behavioural economists are extremely pessimistic about the chances that brain studies will deliver any useful insights. However, Daniel Kahneman, a Princeton University psychologist who in 2002 won the Nobel prize in economics for his contribution to behavioural economics, is an enthusiastic supporter of the new field. In many areas of economics, it will dominate, because it works, says Mr Kahneman.
But setbacks, as inevitable as it sounds has impact on this throey as well! 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 takein the jargon, their revealed preferencesnot 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.
Being rational and quantifiable, thats how decision making works!
A third year engineering student from National Institute of Technology(NIT), Rourkela. A philosophic and anarchist fellow with keen interest in current socio economic issues and with a vivid passion for ideal society and a believer of Good economy is good politics. A rigorous reader of novels and an awarded debater. Highly reasonable mindset and likes to find solutions to topics that influence the stature of economic and political base. Motivated for social service and a member of Leo club. Email: Pratiktheinvincible7@gmail.com