BE 7: Neuroeconomics

Neuroeconomics: definition

Study of the biological microfoundations (neurochemical mechanisms) of economic cognition (emotions/ decision-making/ preferences/ memory/ behaviour...)

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Neuroeconomics differences...

Treats economics at natural science by looking inside the 'black box' (gets rid of 'as if' assumptions/ info asymmetry by looking directly in the brain)

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Methods + tools (humans): 1) Studying humans with lesions in brain

Gives info about the function of the brain area

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Methods + tools (humans): 2) Observing the brain

1) Indirect (blood pressure/ pupil dilation = mental effort) 2) Direct (brain imagery EEG/ fMRI)

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Methods + tools (humans): 3) Stimulating the brain

Psychopharmacological interventions (placebo controlled administer of substances to inform functioning of neurotransmitter/ neurohormones e.g. Oxytocin)

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Methods + tools (animals): 1) Create controlled lesions in brain

Gives info about whether that area of the brain is essential for function

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Methods + tools (humans): 2) Single cell recording

Measuring the electrical potential of particular neurones

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The brain system

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The brain system: Neoclassical economics

Analytic system (external): slow/ conscious/ forward-looking/ self-regulating/ effortful + exhaustible

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The brain system: Psychology

Affective system (internal): fast/ unconscious/ myopic/ effortless

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The brain system: Analytic + Affective systems interact

Behavioural economics

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Insights: Decisions under risk: theory

Neoclassical: risk is equated with variation of outcomes + one-dimensional/ Neuroeconomics: different parts of brain process risk (known prob. = risk aversion) and ambiguity (unknown prob. = behavioural biases)

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Insights: Decisions under risk: 2D:4D finger experiment

Individuals with longer 4th finger (smaller 2D:4D ratio) had higher profits (longer 4th finger = more testosterone = more risk in trades = more success on avg.)

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Insights: Prospect theory relation to the brain

1) Genetic differences change sensitivity to framing (reference point) 2) Different brain locations for loss/ gain (loss aversion) 3) Other biological correlates with overweighting low prob + underweighting high prob (non-linear decision weights)

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Insights: Intertemporal choices: general model

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Insights: Intertemporal choices: quasi-hyperbolic model

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Insights: Intertemporal choices: quasi-hyperbolic equation

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Insights: preferences + utility

Neoclassical: emotions underlying choice unable to be objectively measured, so use preference theory ('as if' - unobserved characteristics reveals by observable choices)/ Neuroscience: emotions can be objectively measures

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Insights: social preferences: responder behaviour in ultimatum game

When an unfair offer was given there was an even lower acceptance if given by human than robot (affective system 'punishes' as emotional response)

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Insights: social preferences: trust + neurohormone (Oxytocin)

Oxytocin promotes sense of trust (in humans + animals) as when individuals given a dose (Psychopharmalogical intervention) they were more likely to give back more of their winning amount (% of $10 x3 = $30)

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BE 7: Neuroeconomics

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