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Management in Practice

What is neuroeconomics?

The new field of neuroeconomics looks at how economic decision-making actually happens inside the brain. Jonathan Cohen, co-director of the Princeton Neuroscience Institute at Princeton University, describes insights that are emerging from the collaborative work of neuroscientists, psychologists, and economists.

  • Jonathan Cohen
    Eugene Higgins Professor of Psychology, Co-Director, Princeton Neuroscience Institute

Q: What is neuroeconomics?

Neuroeconomics tries to bridge the disciplines of neuroscience, psychology, and economics. I think of economics and psychology as really, in some sense, one discipline. I know that that's a strident statement to make, but they really are siblings separated at birth. Psychology and economics are complementary disciplines, in many cases studying the same phenomena: decision making, value-based judgment, heuristics. One side approaches it from a phenomenological, experiment-driven perspective and the other from an abstract, theoretical perspective.

Psychologists, with exceptions, have pretty much been empiricists. Human behavior is complicated. We might have a theory but don't have enough data to test it. Any theory would make many assumptions but we don't know which ones are valid. So, the discipline, at least over much of its life, has focused largely on collecting data, deferring the development of formal theory. Economists did the opposite. It's all about theory. The experimental approach of behavioral economics is a relatively recent innovation.

I see neuroeconomics not just as an opportunity to think about the neural mechanisms underlying economic decision making, but also as an opportunity to help discipline psychological and neuroscientific theory with the tools of mathematics.

Q: What is the brain telling us about economics?

Why can't we just continue to treat it as a black box? If you've got a device that gets you from point A to point B and it's not working, you need to know if it's trying to fly or to roll, because that will tell you whether a wheel or a wing will fix it.

Behavioral economics has shown that humans don't always work in the ways that economic theory would predict; that is, in a way that optimizes utility. In that sense, it might be thought that we often break down. Insight into the mechanisms driving us can help us understand what is actually happening.

I actually don't think that we are breaking down. I think people can be pretty optimal, when all is said and done. The problem is that the economic model assumes that we're one person and that we evolved to deal with the circumstances that we're in. Those are both bad assumptions.

Evolution solves problems that are local to the circumstances in which they arise. To pick an economic example, and this is just a hypothesis, we probably evolved to have very steep discount rates. When we were lizards, there were no bank accounts, there were no refrigerators, and there were no property rights. There was no way to plan for the future. There was just what you had right now and you better consume it, because unless genetics had endowed you with some very specified routine for burying things and finding them later, there was no general solution you had for dealing with how to protect things for the future. And so we developed these very steep discount rates. Use it or lose it.

In the course of evolution, humans ended up developing a part of our brain, the prefrontal cortex, that has solved that problem, at least in many contexts. It knows how to think about and plan for the future. It's the part of the brain, I would contend, that gave us things like bank accounts, refrigerators, and property rights. And so it created a world in which there is a future of which we can take advantage. But evolution is conservative, it holds on to solutions that evolved in one circumstance, and may engage them in others. This can be a good thing. For example, it's still the case that, in some circumstances, like where you're caught in the middle of a disaster, that banks, refrigerators and the property rights don't matter, in which the evolutionarily older part of your brain still serves you well.

The problem is, we're not always sure which are the circumstances the older part is good for and which are the ones that our prefrontal cortex is good for. So we live in a funny world in which different parts of our brain are adapted to different types of circumstances, but we don't have a control structure that knows which one would be the most appropriate in any given instance; we're not optimized in that way. And yet we have to make such choices all the time.

Insofar as there is not an easy, understood, optimal solution to this problem (and there may be none), then we can benefit by looking at the mechanism and considering what the device is designed to do in the various contexts in which it got designed. And then we look at how the mechanisms interact with each other. That's what begins to explain the idiosyncrasies we see in human behavior — why sometimes people are impetuous in their spending, and other times they are more providential.

Q: Do you think that will eventually lead to an alternative to classical economic theory?

I think that classical economic theory probably describes a good first approximation of some part of our brain. After all, it was invented by some part of our brain. There are times we behave in rough accord with it. When we are thinking about our global goals and we have the luxury to contemplate the relative merits of this versus that, and we're not as pressed by our immediate needs or emotional responses we tend to make rational choices. And that's not to say that those emotional responses don't have optimal functions of their own — but they are not as aligned with standard economic theory.

Q: Are rational and emotional the two core pieces that you're looking at?

I would say "deliberative” versus "emotional.” And that may sound like a subtle distinction, but it is actually fundamental, because rational implies optimality — rational is "to the best of my ability at the time,” right? And emotions can be rational.

Emotions are quick, immediate responses that were developed either through biological or cultural evolution. They are quick and efficient because they are important to survival. If you see a snake ready to strike, you don't want to pause to think, well, is that a toy snake or is that a poisonous snake? You jump — that's the right thing to do — and then think about it later. That emotional fear response to a snake is rational in a world where there are poisonous snakes. Deliberation is exactly what it sounds like, careful thinking about complex relationships. It takes time. So I don't want to say "rational" versus "emotional." I want to say "deliberative" versus "emotional."

It is hard to get the balance right, because each has its place, and it's hard to anticipate which is going to be the right one. It depends upon many things. So that's the sense in which the standard economic model may be a myth, or at least relevant to only certain types of our functioning. We have to be more precise and detailed in thinking about the mechanisms and factors that are driving us.

Q: What is the big picture for neuroeconomics going forward?

A downside concern is the over-selling of what is likely to happen in five years' time. The brain literally has astronomical complexity. And I don't think anybody would dispute that understanding how the human brain works is the most complex challenge that scientists face. It's just an overwhelmingly complex device. And it's not going to be understood quickly, so anybody who asks us how to design economic policy based on some fMRI image is like somebody asking, in 1910, how to use chemistry to get us to the moon when the rockets capable of this hadn't even been invented yet. So it's a long path we're on.

That's not to say that there won't be side products along the way. There might be simple problems that turn out to be tractable and quickly solved. I can't predict what those are. If I could, I'd be working on them. I think a deep understanding that will be useful to and appreciated by economists is decades away. But we'll never get there if we don't start somewhere.

Q: What's exciting about the work?

What gets me excited is that I can watch, in close to real time, what's happening in someone's brain while they're performing some mental task. That's pretty exciting. I grew up watching Star Trek, when it was entertaining to imagine such a possibility, but it couldn't be taken too seriously. When Bones said, "Put him in the scanner and let's see what he's thinking" — I don't know if he ever said that, but the idea that you could examine the brain activity of a human noninvasively was science fiction, literally. I mean, there was no hope that that was going to happen any time soon. And then, 25 years later, we're doing it.

Without so much as a pin-prick, we're looking at what's happening in someone's brain while they think about things. Maybe I'm just a geek, but that's exciting to me. And every time I see it happen I get a little chill down my spine and I think, "Oh, wow, Bones.”

And every once in a while, we come across something really remarkable. The experiment really works. It teases out exactly what's happening. A lot of those insights are pretty arcane, because it's a complex system, but they're incredibly exciting.

Interview conducted and edited by Ted O'Callahan.