Economists are fond of modeling. They model holiday spending predictions, the effects of tax increases, crude oil revenue and the meandering price of milk at the local grocery store. What economists are not so fond of is when their models fail to predict what happens in the real world, a world that's not always rational and where people don't always act in their best economic interests.
People would rather receive $10 today than $15 a month from now. They'd rather go to prison for a long time than betray their partner in crime (well, at least in thought experiments). They fret more about making more than their neighbors than they do about the absolute size of their paychecks.
None of these scenarios makes sense in a standard economic model, which depends on people acting selfishly over time. There seems to be something about real behavior that can't be explained through traditional equations and graphs alone.
So economists are turning to psychologists and neuroscientists for help in answering some of these unsolved mysteries in economic behavior, such as how the mind processes supply and demand, relief and regret, and immediate and delayed gratification. Teams of psychologists, economists and neuroscientists across the country are teaming up at major neuroeconomic centers such as Harvard University, New York University, Rutgers University and Duke University. Several international researchers are involved as well, hailing from a number of countries including Taiwan, Germany and Switzerland.
Tackling these problems could provide a boon to therapists as well as economists.
"There are some interesting clinical applications," says Paul J. Zak, PhD, director of the Center for Neuroeconomic Studies at Claremont Graduate University. "The research could help in treating addictions, depressions and social phobias."
In the long run, neuroeconomics may even help reduce global warming by helping researchers understand why people discount their futures for present comforts.
Unraveling economic mysteries
Some date the birth of neuroeconomics to a 1999 study by neuroscientists Paul Glimcher, PhD, of New York University, and Michael Platt, PhD, of Duke University, that brought neuroscience to bear on economics. The duo found that by rewarding rhesus monkeys with juice when they looked in a certain direction, they could predict the monkeys' reward expectation by looking at neuron activation in the lateral intraparietal cortex-an area of the brain linked to spatial awareness. In effect, this area of the brain was performing the complex calculations required to determine which action would garner the greatest reward-economics in action.
The previous example was an easy fit for economists: They knew the brain made those calculations, but they didn't know how. But what about those economic mysteries? Why would you trust your expensive digital camera in the hands of a total stranger to get your picture taken at Disneyland?
Animal models suggested the hormone oxytocin played a part in social behaviors, so in 2004, researchers decided to see if it played a role in human interactions, too. Zak, along with psychologist Robert Kurzban, PhD, at the University of Pennsylvania, and internist William Matzner, MD, PhD, tested people's hormone levels as they played a trust game with a partner. In the game, one player was given $10 and told to give any amount of that sum to a second player, where that amount would triple. The second player could then give any amount of that tripled sum back to player one. The trust comes in when the first player has to decide how much to give to player two; if they give the entire sum, they stand to earn the biggest return-but only if player two doesn't keep it all for him or herself.
Immediately after each decision, the researchers took a sample of the players' blood and analyzed it for hormone levels. They found that when players received a signal of trust from their partner-whether it was player one handing over all or most of the initial $10 or player two returning an equal share of the tripled sum-their oxytocin levels increased by nearly 50 percent. Furthermore, high levels of oxytocin in player two accurately predicted a high rate of return for player one.
Zak and his colleagues had stumbled across a "trust" hormone that stimulates warm feelings of togetherness and social cohesion. It was a biochemical answer to the puzzling economic question of blind cooperation: cooperating itself is rewarding.
In the trust game, cooperation is mutually beneficial. But some other quirky economic behaviors seem to have negative results despite their good intentions. Ming Hsu, an economics postdoc at the University of Illinois at Urbana-Champaign, presented a study at the September Society for Neuroeconomics meeting in Hull, Mass., which looked at how people evaluate fairness and equality. He worked with neuroscientists to take functional magnetic resonance imaging (fMRI) pictures of people's brains while they made decisions about how much food to send to needy orphans in Africa. He found that people were far more inclined to distribute the charity food evenly than to give some orphans more than others-even if the letter meant the total amount donated would be higher.
Looking at the fMRI results, Hsu and his colleagues found that brain regions known as the insula and the caudate head showed high levels of activity when making "inequity-averse" decisions. Another brain region, the putamen, is known to correlate with decisions involving overall efficiency. The inequity-averse brain regions seemed to override the efficiency region in Hsu's study, mirroring how people valued equality over efficiency, at least in this example.
Studies such as Hsu's are poking holes in the classic economic models. As such evidence accumulates, economics will encompass brain function and human behavior, as well as mathematical models, researchers say. The invisible hand will finally be seen in the activation patterns of neurons and the consequent effects on individual behaviors.
The textbooks will be rewritten in the next 10 years, says Zak, who kicks off his own introductory economics class with an introduction to the brain.
Traditional economics will have to be updated to account for the physiology of emotion, which affects consumer desires and willingness to cooperate, Zak says. What's more, people's past experiences influence their economic choices throughout their lives, says Richard Suzman, PhD, associate director of the Behavioral and Social Research Program at the National Institute on Aging (NIA). And personality plays a major role in economic decision-making, he says. For example, if your parents were thrifty and taught you to be thrifty, that can have a big effect on your later economic decisions. That attention to individual experiences is lacking in most economic models, but it's something psychology regularly addresses. Add brain imaging into the mix and scientists can see when and where in the brain these economic decisions are taking place-information that can reveal what decision-making processes come into play.
Economists are increasingly amenable to these neuropsychological approaches, thanks in part to the lowering costs of brain imaging technologies, Zak says, allowing more and more scientists-including economists-to peer into neurons' heretofore secret lives.
The big funding organizations have responded to this enthusiasm. NIA now funds nine neuroeconomics projects including studies of how economic decision-making declines in old age and how people assess risks and rewards across their lifetimes. The National Science Foundation sponsors a summer neuroeconomics program for graduate and postdoctoral students at Stanford University.
"I'm very impressed with the potential for understanding how people make both big and small decisions, from 'What am I going to eat for lunch tomorrow?' to 'When am I going to retire?'" Suzman says. "Both disciplines bring a lot to the table."
However, experts in brain imaging encourage new researchers to proceed with caution. Solid fMRI studies require careful study design, and while the costs of fMRI have gone down, they're still considerable. (A single fMRI scan costs around $600.) So some studies that would have had 50 participants are now down to 10 or 15 to lower the cost, which ultimately reduces the results' validity, says Elke Weber, PhD, a Columbia University psychologist and president of the Society for Neuroeconomics.
And while fMRI does provide one important angle, it shouldn't come at the expense of other research methods such as lesion studies and behavioral measures, Zak adds.
Another problem facing neuroeconomics is its status as what Zak and Weber both refer to as a "bandwagon science." According to Zak, a lot of scientists are drawn to the field because it's new and exciting and attracts funding, but they're not going about it the right way.
"There's a sense that there is a lot of low-hanging fruit in neuroeconomics," Zak says, referring to the abundance of economic behavior predictions that can easily be tested in the lab. "And it produces a lot of slapdash studies that are not well-designed."
Zak predicts that within 10 years or so, though, most of this low-hanging fruit-like which brain areas correspond to different economic behaviors and which physiological pathways are responsible for variance in decision-making-will have been picked, leaving neuroeconomics to mature into a more established, respected discipline.
"When you have a brilliant idea like neuroeconomics and put it to work, people will see and act on the success of it," Weber says.