Introduction to Neuroeconomics

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Introduction to Neuroeconomics

1. Economics in our life

Economics is the social science that aims to describe the factors that determine the production, distribution and consumption of goods and services. It is a well-known fact, the term economics comes from the Ancient Greek п?кпнпмЯб from п?кпт (oikos, "house") and ньмпт (nomos, "custom" or "law"), hence "rules of the house (hold for good management)". What does this science do? It explains to us how we can use limited resources to supply the crying wants of the people.

Economics learns the behavior and interactions of economic agents and how economies work. Consistent with this focus, primary textbooks often distinguish between microeconomics and macroeconomics. Microeconomics examines the behavior of basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions, the main principles of doing business, market structures, and market prices. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labor, capital, and land), inflation, economic growth, the public policies that address these issues (monetary, fiscal, and other policies), System of National Products and Income Accounts that was discovered by Simon Kuznets in the end of 1920^th year (GDP, GNP, net factor income from abroad, NDP, NNP), and many other things. neuroeconomist scientific making coding

Economics and economy give us the answers on the next important questions:

1. What to produce

2. How to produce

3. For whom to produce.

Economics play a big role in our modern life. Firstly, economists can advise governments how to manage the economy and avoid problems such as inflation and unemployment. To tell the truth, both inflation and unemployment can be devastating for society. Economists argue that both can be avoided through careful economic policies (using the method of monetary and fiscal policies). However, the problem is that economists may often disagree on the best solution to these problems. For example, at the start of the great depression in 1930, leading economists in the UK Treasury suggested that the UK needed to balance the budget (higher taxes, lower unemployment benefits). But, on the contrary, this made the recession deeper and led to a fall in demand. At that time John Maynard Keynes, one the most famous economists, developed his general theory of Employment, Income and Money. This theory contained the idea of the fact that classical economics (that was developed in the late 18th and early 19th century by Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus, and John Stuart Mill) had the wrong approach for dealing with depressions. J. Keynes argued for a different expansionary fiscal policy higher borrowing and government spending. Secondly, economists play a big role in overcoming market failures. Generally, free markets offer a better solution than a planned economy. But, sorry to say, free markets invariable lead to problems such as the overproduction of negative externalities (pollution), the underproduction of goods with positive externalities (education, health care, public transport), no provision of public goods. It is not very critically. Besides, economists can suggest policies to overcome these typical problems. For example, tax negative externalities and subsidize public services like health care and education. Thirdly, the importance of economics is that we can examine whether society will be better off if government intervenes in the provision of certain goods. As the history shows, it is really so because some kinds of goods that call `public goods' are not supplied by firms. That's why, the government should supply us with such goods. Moreover, the government should regulate the degree of monopolization of the market. It is necessary because consumers should have the option to choose high-quality goods and services at a reasonable price. Fourthly, the economists can increase the efficiency of an economy. And fifthly, economics, its learning, is also important for individuals. Only think, every decision we take involves an opportunity cost: which is more important and valuable working overtime or having more leisure time?

So, economics is important for many social spheres. It can help improve living standards and make society a better place. It partly depends on the priorities of society and what we consider as the most important thing in our life.

2. New directions of scientific development. Neuroeconomics

Nowadays humanity is keeping up with the times developing very rapidly. People are discovering new sorts of plants, learning new sciences. One of them is neuroeconomics. Neuroeconomics is the new interdisciplinary field that combines neuroscience, economics and psychology, in order to create a new seal of decision making.

So, neuroeconomics is based on a simple, but astonishing hypothesis. This hypothesis is very nicely formulated by Francis Crick, a Nobel Prize winner: we just suggested that our mental activity, our decisions, is the activity of our brain. So our mental activity is simply a biochemical process in our neurons, in our neuronal percolation. This is a very simple idea. But at the same time it can trigger conflict for social scientists. So, from this perspective our decisions and our mental activity are nothing more but the activity of our brains. And if you are against this idea, if you are against this astonishing hypotheses you anyway have to adopt this idea. So, this basically is a foundation of neuroeconomics. So strictly speaking, neuroeconomics is a field combining psychology, neuroscience, biology, and economics. And, of course, neuroeconomics focuses on decision making.

The field of decision making is largely concerned with the processes by which individuals make a single choice from among many options. It's normal that each of us tries to make the most optimal decision in various situations of our life. While there has been support for this economic view of decision making, there are also situations where the assumptions of optimal decision making seem to be violated. The field of neuroeconomics arose out of this controversy. By determining which brain areas are active in which types of decision processes, neuroeconomists hope to better understand the nature of the decisions that seem to be suboptimal and illogical. While most of these scientists are using human subjects in this research, others are using animal models where studies can be more tightly controlled, and the assumptions of the economic model can be tested directly.

But what has neuroeconomics been discovered for? The mainest aim is to merge cognitive psychology, social sciences, and economics together and create a unified theory of decision making. So, this is a very ambitious plan, but this is also a very exciting and provocative idea. The reason to combine economics, psychology and neuroscience together is fundamental: all of these sciences have own biases. Moreover, they are very much limited and narrowed by own field. And in modern world it is a problem because people have to develop in some directions at the same time, but these sciences have certain assumptions that are quite often violated by different fields of science. So, here are some examples how important measure assumptions of different sciences are violated by different fields of science. For example, economics. Normative theory of economics suggests that we are rational, and we make our decisions rationally. It suggests that our decisions are consistent and logical. Famous example, so-called Asian disease example, illustrates a lack of rationality in our decision making. Imagine that there is an outbreak of a strange Asian disorder in the United States. This disorder is expected to kill 600 people. Imagine that you're in the special medical committee that has to select one of the programs to treat this disorder. According to the Program A, 200 people will be saved. If the Program B is adopted, there is a one third probability that 600 people will be saved and a two thirds probability that no people will be saved. So, which program would you select? As many studies show, a lot of people prefer the Program A, because this program guarantees that 200 people will be safe. But let's now make another decision and select between two other options. Imagine that you're offered two other programs. If you adopt Program A, 400 people will die. If you adopt the Program B, there is a one third probability that nobody will die, and a two thirds probability that 600 people will die. So which program would you select now? Many studies show that people prefer program B here. But let's compare these two programs. So, here are two versions of this experiment. You can see that there are identical options. Just look at the program A. In the first example, if Program A is adopted, 200 people will be saved. But this is identical program to the Program A below, that states that if it is adopted 400 people will die. As you see, they are two identical programs, but they are framed in a different way. So surprisingly, simply the framing of the options can change our decisions. So, our rationality is quite limited. Of course, we can not say that we are absolutely logical and consistent. Our decisions demand on the framing of the options very much. So, psychology itself suffers from some old biases, too. It investigates our behavior. And based on our behavior suggests some cognitive processes, cognitive systems that can modulate our decisions. Memory and attention can modulate our decision. In fact, psychologists explain behavior by behavior. Does it bring us some new insights to the mechanisms of our behavior? In my opinion, it isn't so. We should go step lower to understand our mental activity, to the neural level. We should try to study the structure of our atoms, atomic structure. And this perspective would bring us completely new insights to the micro level. As for neuroscience, it is very egocentric. Neuroscientists really believe that if we investigate the single brain of single individual, we shall understand the brain mechanisms of decisions of our behavior. But to tell the truth, just think about it, we never make our decisions alone. In reality, our decisions depend on social interactions, on the people with whom we are communicating. It illustrates the experiment that was made in Cambridge. Imagine the scientist who fed ducks in Cambridge in the lake. He fed the ducks with a constant rate two grams per five seconds. And his friend on the other side of the lake fed ducks, but with a slower rate, only two grams per ten seconds. Decide what you should do as a duck. Maybe, you will go to the place where there is more food available. But if all ducks go there you will have a shortage of food. It will be smart to go to another side where there are no ducks. These arguments show that your decision depends on the decisions of others. And if we make a list of the distribution of ducks in this experiment, we can certain of the fact that ducks will distribute in a very rational way. So in order to understand our decisions, we have to understand how decisions are made in social context. This task is one of the mainest for neuroeconomics: to understand why we make such decisions, to show social dependence of decision making and to remark our decisions from the economical and biological points of view.

So, one of the first breaks in neuroeconomics was concerned with Brian Knutson's experiments that showed how the values of decision making were coded in the brain. He suggested a very simple paradigm. The probationer should press the button on time; in addition he saw some information on the screen that demonstrated how much money he could get, if he did the task correctly. So, he could get nothing, or 20 cents, or 1 dollar, or 2 dollars, or 5 dollars. It was found that there were the areas of the brain that coded the expected value of decision making. These areas' activity is proportional to reward that the person expects to get. This trivial observation contacted neurobiology with neuroeconomics because values (utilities) in economics are the key concept for the theory of decision making. According to the economic theory of decision making, if the person chooses between two options, he will choose the option with maximum expected utility.

If we understand how the value codes, we can predict your decision: you will choose the option with maximum expected utility.

Neurobiology gave to economists some means to look into the brain and directly look at the inner values at the decision making.

Why is it important? There are two fundamental theories of the values' role in the decision making in the economics. They are ordinal and cardinal values (utilities). The theory of cardinal utility supposes that we can estimate each option and choose the option with the maximum utility (this utility can characterize with the absolute figures. For example, you are choosing between two burgers. Burger #1 has the subjective utility 5; burger #2 has the subjective utility 10. That's why you are choosing the burger with the maximum utility (burger #2).

But, to tell the truth, often we can't estimate these cardinal utilities. For instance, how can you estimate in the absolute figures your preferences to J. S. Bach and to the burger? You can rather estimate your comparative preference. For example, if you are very hungry, you will prefer the burger, but if you do not want to eat and you like classical music, you will prefer listening to the Bach's music. And so, economists exclusively use comparative utilities: I prefer this option more than others. Economists have a joke. Imagine the economist who met the familiar person. This person asks him: `How is your wife?' The economist answers: `Concerning what? Concerning the dead mother-in-law she feels not bad, but concerning, for example, my dean's wife she feels quite bad'.

So, economists use comparative utilities. Neurobiologists gave them an opportunity to look into cardinal (absolute) utilities. For neurobiologists the utility of decision making is the total activity of neurons.

The next step of neuroeconomics' development concerns with Antonio Damasio's researches. He learned patients who had breaches in the orbitofrontal cortex (a prefrontal cortex region in the frontal lobes in the brain, the region under the eyes). The researches showed that the group of patients had the high IQs (they were very intellectual people), but the patients had these breaches, and these people took very strange decisions. For example, time and again they invested ravaging companies; often these people ravaged themselves, lost the work, and had the problems with their friends and families. Antonio Damasio characterizes the problems of such a person with the example of the choice of the meeting point with friends in the restaurant. It is not a difficult task for us. If our friends and we like this restaurant, we shall go there. But the patient with breaches in the orbitofrontal cortex begins the endless search of alternatives: let's meet at restaurant #1 but, maybe, there are high prices there; let's meet at restaurant #2 but its service is very slow; let's meet at restaurant #3 but its cooking is bad, and etc. It is the hyperrational person who can not take an optimal decision. The reason is that the orbitofrontal cortex is important for the integration of information about alternatives: our memories and our emotional senses. The orbitofrontal cortex integrates information for and against decision, that's people with the breaches in this cortex can not take optimal decisions.

And the final direction of researches formed neuroeconomics is the researches of California Institute of Technology concerning with learning the prefrontal area of the cortex (the cerebral cortex which covers the front part of the frontal lobe). The results of researches showed that the frontal areas of the cortex can be responsible for self-control. People who keeps to a diet know that sometimes it is very difficult not eat something sweet and delicious. Influencing on these areas of the cortex we can influence on person's self-control. For example, people who keep to a strict diet and withstand temptations have especially active prefrontal areas of the cortex. Besides, these areas influence on the orbitofrontal cortex and areas concerned with neurotransmitter dopamine (coding values).

So, self-control can modulate values that were coded in other areas of our brain.

Conclusion

In conclusion, I would like to stress that for neuroeconomists the process of decision making is consist of the cascade of the engagement processes of various areas of our brain coding values and integrating arguments for and against one or another decision. Our decision is the activity of neural network system.

So, nowadays the new area of knowledge is appearing connected with neurobiology, economics, psychology and evolutionary theory. This new science tries to explain our decision making as the activity of our brain and understand how genes and hormones influence on our decisions. Neuroeconomics should create the new integrative theory of decision making. It is a very interesting `young' science, and I really hope that you have been interested in it.

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