How neuroscience can inform economics?

A new discipline, Neuroeconomics, studies economic behavior through the scientific analysis of brain functions, using research methods from neuroscience, social psychology, and cognitive psychology.

In this post we are going to answer the question ‘’ How neuroscience can inform economics?’’

We expose the important role that neuroscience plays in an economic and financial environment. In this sense, we present neuroeconomics to describe how decision-making processes affect brain activity, pointing out and focusing on the importance of economic and financial decisions.

How neuroscience can inform economics?

Economics uses neuroscience knowledge of brain mechanisms in the decision-making process and the relationship between emotions and the behavior of economic agents.

The ease with which information flows today, the massification of the internet, the “open access” of some primary sources, among other factors, have revolutionized and facilitated collaboration between fields previously considered distant.

For example, in the basic sciences, this flow has imposed an imperative need for integration and expansion of traditional methods, demanding not only greater collaboration between different disciplines, but also facilitate it.

Indeed, this ease with which information is accessed has led to a greater interest in multidisciplinary work. An example of this integration is evident in the neurosciences.

Here is an analysis of how neuroscience, economics and marketing have developed complex collaborative programs characterized by the exchange of measurement instruments, as well as theories, to add accuracy and precision to their fields of application.

Since ancient times, human beings have shown great interest in the functioning of the human body, and specifically, the nervous system, which has motivated the use of neuroscientific tools, initially rudimentary (unethical by current standards) and today extremely sophisticated, to associate human behavior with specific biological structures.

This interest is originally nourished by the knowledge contributed by areas such as medicine and physiology, until it becomes a relatively independent science, enriched by the pioneering work of scientists such as Golgi, Ramón y Cajal, Hodgkin, Huxley and Brodmann, just to quote a few. Neuroscience is relatively independent, although it operates in a world of constant flow of knowledge.

Since its origins, neuroscience has interacted with areas such as biology, chemistry, mathematics, computing, among others, but some of the most recent examples of its diversification are economics and marketing.

These areas emerge as respectable and worthy fields, although they are sometimes subjected to the suspicious scrutiny of the most purist scientists. However, and despite these criticisms, they are rapidly advancing in their interest to gain ground in the production and dissemination of knowledge.

What’s Neuroeconomics?

Neuroeconomics is the research program dedicated to studying the relationship between decision-making and the activation of specific brain structures. Furthermore, it associates specific patterns of activation of the nervous system with emotional, impulsive or weighted decisions of the subjects investigated.

When it comes to human decision-making, neuroeconomics assesses the ability to weigh various alternatives in order to select the optimal one. In addition, it’s capable of providing detailed models of what happens in the consumer’s “mind”, just as organizational economics can provide models of what happens in a company.

The Society for Neuroeconomics of the United States states in its charter that neuroeconomics promotes discussion about risk, value, reward, learning, emotion, and social behavior, not only in order for the existing theory to evolve, but also to provide evidence on the fundamentals of economic conduct.

It also studies the identity of the economic individual, with a vision that combines the subject defined by economics as a “theoretical construct”, with the subject that neuroscience defines as a set of biological structures.

In fact, some scientists view neuroeconomics as an extension of behavioral economics, because it incorporates neuroscientific evidence into the economic behavior of the individual. Others consider it an extension of the neurocellular economy, because it uses mathematical tools such as modelling to create projections and predict individual and group behaviors.

How does neuroeconomics work?

Neuroeconomics was originally born as a research program based on the tools of contemporary economics and neurosciences that seeks to add another level of complexity to the study of economics. Its complexity lies in the fact that it uses scientific and technical tools from the neurosciences to address the questions already posed by the economic sciences.

The level of sophistication of these instruments ranges from traditional pencil and paper tests to computerized games, functional magnetic resonance imaging, electroencephalography, among others.

These instruments are indirect methods to study the neural substrates of the behaviors of the subjects before certain stimuli or situations. In other words, they are methods that allow us to associate the activities of groups of neurons, or brain regions, with certain sensory stimuli.

The tools commonly used by the neurosciences and cognitive sciences are of great use to economics. For example, cognitive science has shown that pupillometry, which measures pupil dilation, provides quantitative information about mental effort.

Both the physiological measures commonly used in medicine such as blood pressure, sweating level and heart rate, as well as those related to psychological states such as anxiety, sexual arousal, mental concentration, are often used frequently in studies of neuroeconomics.

One of the instruments of neuroscience that we could call classic, encephalography (EEG), measures the electrical activity of groups of neurons from the surface of the skull using electrodes.

The EEG is popular because it has high temporal resolution, which means that it can measure the voltage changes of these groups of neurons with millisecond precision; its spatial resolution is relatively poor because it measures groups of cells; although today very useful computer programs have been developed that have improved their spatial resolution.

In general, when seeking greater spatial resolution, functional magnetic resonance imaging or positron emission tomography are used, although these instruments also have their limitations.

Other methods that have served to evaluate the behavior of the subjects include studies of injuries, which can be caused by pathology, surgery, trauma; and recently, in the case of virtual (and transient) injuries, these are caused by transcranial magnetic stimulation (TMS).

With these and other tools, neuroeconomics evaluates a series of problems, such as the reaction to certain rewards.

While traditional economics argues that the value of money lies in the goods and services that it can buy, that is, that money has an indirect utility, the work in neuroeconomics suggests the activation of dopaminergic neural circuits as a reaction to monetary rewards similar to those of that are activated by a variety of rewarding experiences such as those related to food, attractive faces, stimulants, etc..

Interpretation of this finding suggests that, unlike traditionally proposed, money may itself be a direct reward.

Injury Studies

In the same way, injury studies have provided simple tools to evaluate the process by which subjects make risky decisions, and especially the brain structures associated with these decisions.

Professor Antoine Bechara, today at the University of Southern California and his collaborators studied the decision-making process in individuals with prefrontal lesions compared to healthy subjects, using the gambling test.

In these, individuals are given the option of selecting cards in succession using four packages. Two of these card packs contain risky decisions (you lose money at the end of the game) while the remaining two contain conservative decisions (you win money at the end of the game).

In the game, the gains and losses are balanced as follows: in some options the gains are large and sporadic but the losses are greater, while in the other options the gains are small but more frequent.

In Bechara’s study, the brain-injured subjects never learned that the least risky decisions (the cards with the lowest winnings and the lowest losses) represented a significant profit in the end, while the riskier ones would leave them without profit.

The results of this study suggest a relationship between decision-making and the activity of the brain’s prefrontal cortex. Other physiological conditions that influence decision-making include focused brain injuries, as well as some social problems, such as addictions and compulsive gambling.

What can we say about neuroeconomics?

Decision-making processes have puzzled researchers for decades: several research areas, such as psychology, business management or economics, among others, have studied them.

Questions such as why humans choose a certain option from two equals or why our economic behavior differs despite the existence of rational models that can guide our decisions are some of the questions that lead this line of research.

These examples can be observed in the real world and analyzed by studying various variables such as risk, uncertainty, or bounded rationality. A neuroscientific perspective allows us to analyze this phenomenon in a deeper and more exhaustive way, as well as to link it with emotional and psychological perspectives.

Thus, while differences in brain structures can alter a person’s behavior, behavior can also alter brain structure. From a neuroscientific perspective, emotions are not determinative, but they are crucial to making efficient decisions.

On the other hand, the effects of hormones such as cortisone, testosterone or oxytocin regulate the balance between risky, greedy or prosocial decisions.

That suggests that training our brain, as well as controlling the markets, can have a direct impact on preventing negative financial scenarios.

Ultimately, neuroeconomics is born from neuroscience and economics to provide an experimental paradigm with access to different brain structures and processes, which represents an expansion of knowledge traditionally based on inferences.

Its main objective is to describe the neural substrates associated with decision making based on concepts proposed by economics.

Neuroeconomics faces the challenge of showing that it can reshape the problems generated by economics in a way that raises new questions for economics, rather than bloat the data that already exists in this discipline.

Furthermore, neuroeconomics has the potential to add accuracy to some standard functions and parameters of economic models, and to demonstrate that some behaviors that are studied as economically similar have different neural substrates.

It’s important to recognize that today many neuroscientists are learning about economics and many economists are learning about neuroscience, which means that the least we can do is initiate a dialogue to see if this combination is feasible within our individual and social context.

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