Home by John S. Allen

Author:John S. Allen
Language: eng
Format: mobi, epub
ISBN: 9780465073894
Publisher: Basic Books
Published: 2015-11-16T21:00:00+00:00

Neuroeconomics: The Brain on Money

Since the turn of the twenty-first century, a small but growing group of cognitive scientists has turned its attention toward understanding the neural basis of economic decision making.5 While animal spirits encompass the psychology of individuals as they are expressed and magnified in groups, the neuroeconomists want to understand the individual, cognitive basis of economic actions. Neuroeconomics builds on a rich body of psychological research on decision making, some of which has already had an influence on economic thinking. However, armed with the latest neuroimaging methods, neuroeconomics looks to provide a cognitive foundation for economic theory.

Akerlof and Shiller’s animal spirits perspective makes it clear that people do not always, or even often, base their economic decisions on rational thinking. This is a top-down approach, looking to understand how economic systems are influenced by individual psychology. The neuroeconomists work in the opposite, or bottom-up, direction, but start with the same basic assumption: that people’s economic decisions are not always based on rational, deliberative decision making. The neurocognitive networks of decision making in the human brain are influenced by many factors. So many, in fact, that the rational weighing of the pros and cons of any particular economic action may take a relatively minor role in economic decision making.

What do the neuroeconomists tell us about decision making? One basic insight is that decision making relies on dual systems in the brain (not always defined in exactly the same way by psychologists), one more emotional or automatic (or “hot”) and the other more deliberative or reflexive (or “cold”).6 Psychologist and pioneering behavioral economist Daniel Kahneman divides them into System 1 and System 2.7 System 1 is the automatic system, which kicks in effortlessly without voluntary control. Some of what drives this system is emotional, such as reacting to a hostile act, but some is based on innate or highly ingrained skills. System 2 requires “effortful mental activities” that subjectively involve active concentration or thought. At the very least, the cognitive activities associated with System 2 require some manner of focused attention. Systems 1 and 2 do not operate independently. As Kahneman says, System 1 is always feeding “suggestions” to System 2. For example, System 1 feeds intuitions and impressions to System 2, which may or may not lead to voluntary actions or be incorporated into systems of belief.

George Loewenstein, Scott Rick, and Jonathon Cohen suggest that modern neuroimaging methods can potentially clarify the complementary roles different cognitive systems (dual or multiple) play in economic decision making, and indeed, many experimental studies provide support for a dual-system model.8 Neuroimaging data, as well as studies of patients with brain lesions, support the dual-system model in decision making for the assessment of risk and ambiguity, in assessing rewards or losses that are distributed over time, and in social decision making. Decision making involves emotional brain systems (incorporating the amygdala and other limbic and paralimbic structures), along with parts of the frontal cortex associated with these structures and other frontal executive regions. Cortical regions outside the frontal lobes may also be involved in specific risk-assessment situations.

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