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Tuesday, September 12, 2006

Reasoning with Your Inner Compulsive Self

Neuroeconomic theories of decision-making hypothesize that within us there are "two warring sides: the first deliberative and forward-looking, the second impulsive and myopic" and the side that wins - the rational side or the compulsive side - determines our choices in a particular circumstance. One goal of this research is to discover how to provide incentives to reduce or eliminate the impulsive, irrational choices:

What neuroeconomics tells us about money and the brain, by John Cassidy, New Yorker: ...A few weeks ago, ... at New York University’s Center for Brain Imaging ..., I met Peter Sokol-Hessner, a twenty-four-year-old graduate student... Sokol-Hessner is ... currently working on a research project in the emerging field of neuroeconomics, which uses state-of-the-art imaging technology to explore the neural bases of economic decision-making. ...

In order to depict economic decisions mathematically, economists ... assume that human behavior is both rational and predictable. They imagine ... a representative human, Homo economicus, endowed with consistent preferences, stable moods, and an enviable ability to make only rational decisions. This ... yielded ... theories that had genuine predictive value, but economists were obliged to exclude from their analyses many phenomena that didn’t fit the rational-actor framework, such as stock-market bubbles, drug addiction, and compulsive shopping...

Richard Thaler ... ; beginning in 1987, ... published a series of influential articles describing various types of apparently irrational behavior... Acknowledging that people don’t always behave rationally was an important, if obvious, first step. Explaining why they don’t has proved much harder...

Not long ago, I drove to Princeton University to speak to Jonathan Cohen, a ... neuroscientist... Cohen has collaborated with economists on several imaging studies. “The key idea in neuroeconomics is that there are multiple systems within the brain,” Cohen said. “Most of the time, these systems coöperate in decision-making, but under some circumstances they compete with one another.” ...

Today, most economists agree that, left alone, people will act in their own best interest, and that the market will coordinate their actions to produce outcomes beneficial to all. Neuroeconomics potentially challenges both parts of this argument. If emotional responses often trump reason, there can be no presumption that people act in their own best interest. And if markets reflect the decisions that people make when their limbic structures are particularly active, there is little reason to suppose that market outcomes can’t be improved upon.

Consider saving for retirement. ... Saving money is difficult, because it involves giving up things that we value now—a new car, a vacation, fancy dinners—in order to secure our welfare in the future. All too often, the desire for immediate gratification prevails. ... [Harvard's David] Laibson has collaborated with Loewenstein, Cohen, and Samuel McClure, another Princeton psychologist, to examine what happens in people’s brains when they are forced to choose between immediate and delayed rewards. ...

The results provide further evidence that reason and emotion often compete inside the brain, and it also helps explain a number of puzzling phenomena, such as the popularity of Christmas savings accounts, which people contribute to throughout the year. “Why would anybody put money into a savings account that offers zero interest and imposes a penalty if you withdraw cash early?” Cohen said. “It simply doesn’t make sense in terms of a ... rational economic model. The reason is that there is this limbic system that produces a strong drive. When it sees something it likes, it wants it now. So you need some type of pre-commitment device to make people save.” ...

There is ... a ... fundamental objection to neuroeconomics and the Platonic view of decision-making. “There is no evidence that hidden inside the brain are two fully independent systems, one rational and one irrational,” Paul W. Glimcher, a neuroscientist ...[at] N.Y.U.’s Center for Neuroeconomics, and two of his colleagues ... wrote in a recent paper. “There is, for example, no evidence that there is an emotional system, per se, and a rational system, per se, for decision making at the neurobiological level.”

In place of the reason-versus-passion model, Glimcher and his colleagues have adopted a view of decision-making that, paradoxically, bears a striking resemblance to orthodox economics. In one experiment, Glimcher and a colleague trained thirsty monkeys to direct their eyes to one of two illuminated targets, which earned them differing chances of getting juice rewards...

Glimcher ... used electrodes to track neural firing... He discovered that ... their brains act as if they were solving a mathematical problem, which is what economists assume when they depict people as rational agents trying to maximize their ... “utility.” “What seems to be emerging from these early studies is a remarkably economic view of the primate brain,” Glimcher and his colleagues wrote. “The final stages of decision-making seem to reflect something very much like a utility calculation.”

If Glimcher’s results could be demonstrated in human brains, they might undermine a lot of neuroeconomics... Economists who have staked their careers on neuroeconomics [reply]... “It isn’t a wholesale rejection of the traditional methodology,” David Laibson said... “It is just a recognition that decision-making is not always perfect. People try to do the best they can, but they sometimes make mistakes. The idea that a single mechanism maximizes welfare and always gets things right—that concept is on the rocks. But models that I call ‘cousins’ of the rational-actor model will survive.”

The modified theories to which Laibson referred assume that people have two warring sides: the first deliberative and forward-looking, the second impulsive and myopic. Under certain circumstances, the impulsive side prevails, and people succumb to things like drug addiction, overeating, and taking wild gambles in the stock market. For now, the new models await empirical verification, but neuroeconomists are convinced that they’re onto something...

I'm resistant to neuroeconomics, but also interested in what they are finding. This captures the essential ideas, but it's only around 15% of the original - there's quite a bit more in the article.

Update: Greg Mankiw discovers this article and says a few words about it.

    Posted by on Tuesday, September 12, 2006 at 02:34 AM in Economics, Science | Permalink  TrackBack (0)  Comments (8)

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