These days, it seems like there’s a “neuro-“ for just about everything. From ethics to aesthetics to law, the brain buffs have managed to infiltrate the ranks wherever they go. And economics is no exception. The field of neuroeconomics incorporates methods from neuroscience, psychology, and economics to study what happens in the brain during everyday economic decision-making. Apparently, there’s a lot going on in there.
A typical neuroeconomics experiment involves asking participants to make a variety of economic decisions, particularly in a gambling situation. While this occurs, the experimenter measures brain activity using functional neuroimaging techniques, like fMRI. For example, a participant might be asked, “Would you rather have 45 cents, or take a gamble with a 50-50 chance of getting $1 and 50-50 chance of getting nothing?” As the experiment continues, the parameters of the game are changed: “What if you could have 43 cents? What about 47 cents?”
Findings from these studies have shown that emotion is intimately involved in economic decision-making. In other words, our emotional response to gains and losses tend to shape our decisions. Scientists have pinpointed the brain areas involved in regret by measuring brain activity in participants who make incorrect and costly decisions while playing economic decision games. These participants showed increased activity in the amygdala, an area traditionally associated with fear, and in the orbitofrontal cortex, which is linked with emotion, reward, and decision-making.
Other studies have shown that the anterior cingulate cortex, which is thought to be involved in error detection and emotional modulation, activates when participants change their playing strategy in the face of reduced rewards. A participant with a damaged ACC makes more errors and fails to switch strategies. The researchers suggested that these participants might not be fully experiencing the disappointment of reduced reward, and therefore miss the signal to change their tactics for playing the game.
Work in neuroeconomics provides new insights into emotion and human decisions, and has lent a totally different spin to money matters. But this isn’t the first time psychology has made its mark in economics. The 2002 Nobel Prize in Economics was awarded to two psychologists for their work in decision-making under uncertainty. As it turns out, according to Kahneman and Smith, we aren’t so rational after all—especially when it comes to numbers and probabilities.
Their work showed that we usually make use of mental short cuts called “heuristics” to reach conclusions. While heuristics are great for making our mental processes quicker and more efficient, they can also lead us to make systematic errors in our decisions. Kahneman and Smith’s work made a sizeable dent in economic theory, which until recently assumed that humans consistently make rational decisions about money.
But while brain science can teach us about how we reason in economic situations, it’s also being used to find the best strategies for making us buy, thanks to the emerging field of neuromarketing. Neuromarketing looks at consumers’ cognitive and emotional responses to ads and promotions using functional neuroimaging. Researchers study participants’ brain activity in response to marketing stimuli in order to learn how consumers reason about what to buy, and what elements of ads they respond to best. Ad designers than use the findings to target positive neural responses in consumers. And the dollars are dished out accordingly.
Thanks to these brain scientists, it looks like money isn’t so simple after all.
