How neuroscience informs behavioral economists. Economists believe that
people are rational decision makers. Von Neumann and Morgenstern developed the
'Expected Utility Theory' which predicts that people are always aiming at earning
as much money as they can. They therefore think that people are economic agents
which make decisions in line with specific game theoretic rules. But is
this really the case? Daniel Kahneman, a behavioural economist, showed with the
'Prospect Theory' that depending on context, people react differently to
losses and gains: you may for instance feel more angry about losing, than
feeling happy about winning ten pounds. In economics this behavior is deemed
'irrational'. Behavioral economics research showed that we are not acting like
'economic agents' and is trying to find out why people are, often predictably,
making irrational decisions.
With neuroscience techniques such as fMRI
Neuroeconomics aims to elucidate how our brains process risks and uncertainty
and whether emotions influence us. Neuroscientists such as Ernst Fehr and
Alan Sanfey, study economic decision-making in the brain, for instance by using
the 'Ultimatum Game'. The 'Ultimatum Game' is a famous social
decision-making experiment, in economics and the social sciences.
Two players have to split a given sum of money.
One player is deemed the 'proposer' and the other the 'responder'.
The 'proposer' offers how the money should be split between the two. The 'responder' can either
accept or reject. If accepted, the money is split as proposed.
If rejected, however, neither player receives anything.
According to economic theory, the 'proposer' should offer the smallest amount possible, and the
'responder' should never reject.
But research showed that lots of people reject offers less than 30%
and often offer around 50%.
So why do people do this?
Sanfey and colleagues investigated 'Ultimatum Game' decision making by use of fMRI.
They suspected that people object to unfairness due to their emotions.
Players may be willing to sacrifice money to punish the proposer.
They hypothesize that unfair offers in particular, would activate
neural structures involved in both cognitive,
and emotional processing. They also tested if players react differently when
they play against a computer, rather than another human player.
The researchers focused on brain areas associated with cognition, emotion, and
the mediation of conflict.
For the cognition aspect, the dorsolateral
prefrontal cortex (DLPFC) was investigated: it is associated with
executive functions, planning, inhibition and abstract reasoning.
For the conflict resolution aspect, the anterior cingulate cortex (or ACC) was investigated
which is associated with reward anticipation, decision-making,
impulse control and emotion.
For the emotion processing aspect the insular cortex (or insula)
which is associated with emotions such as anger and disgust, motor control and
interoceptive awareness, was investigated.
The findings suggest that emotions are a vital component of decision-making:
whenever the responder was faced with unfair offers, her brain activity
correlated with her decision-making. When an unfair offer was accepted,
greater DLPFC compared to in insula activation was measured: this is thought
to reflect the cognitive effort of accepting unfairness.
For the rejection of unfair offers, however, the insula was more active than
the DLPFC: this suggests that rejection is an emotional response.
Overall activity in DLPFC, insula and ACC were stronger towards humans
rather than computers indicating that context matters.
To economists and behaviorists, the brain is a mysterious black box, but
luckily Neuroeconomics research can guide models of economics,
and help us better understand how people make decisions, for instance by showing
on a neural level that we are influenced by our emotions.