What Is Neuroeconomics?

Neuroeconomics is using brains to do economics. In neuroeconomics, theories are constrained by facts about how the brain actually works. Neuroeconomics is a branch of „behavioral economics.“ Behavioral economics uses facts and ideas from social sciences that are neighbors of economics (psychology, sociology, anthropology) to show how willpower, concern for other people, limits on calculating ability, and biology influence economic behavior. Neuroeconoimcs expands behavioral economics by using facts about brain activity. Neuroeconomics is also a new kind of „experimental economics.“ In experimental economics, we create simple bargaining games and markets, with economic motivation, to test theories and establish what variables cause economic outcomes. Neuroeconomics expands experimental economics by measuring biological and neural processes as people choose, bargain, and trade.

When economics developed as a mathematical discipline, little was known about brain processes. Economists were pessimistic that much could ever be known. In the 1870s the economist Jevons wrote „I hesitate to say that it is impossible to measure the feelings of the human heart.“ As a result, economic theories relate observed behavior – what you buy, and whether a strike occurs – variables that are thought to be inherently unobservable, like internal „utilities“ which encode what you like, or „beliefs“ about what will happen in the future.

But Jevons was wrong. Developments in genetics, experiments with animals that are our close biological relatives, and the ability to directly observe brain activity in PET and fMRI scanning have now made it possible to observe detailed processes in the brain much better than ever before. Neuroeconomics takes advantage of these new technologies. Some of the neuroeconomics topics we are studying at Caltech include: Why people find it difficult to attach dollar prices to goods that are not traded (like environmental harm, health, and safety); whether having too many choices actually makes people less happy with what they own; thinking strategically about what other people will do, when you are trying to outguess them or cooperate with them; how people behave when they fear economic unknowns (like starting small business or investing in countries with unstable political systems); deception in bargaining; the neural foundations of intrinsic motivation for working hard, like intellectual curiosity; and moods and investor sentiment in stock markets.