What Is Neuroeconomics?
Neuroeconomics is a relatively new branch of science that bridges Economics, neuroscience, and psychology to study how the brain processes information related to economic decision-making. The purpose of this is to understand better how to make economic decisions.
Neuroeconomics helps bridge the gap between traditional economic theories. For example, according to the economic theory of rational choice, investors assess risks accurately and respond rationally. In addition, the field investigates the links between observable brain activity and economic decisions. Therefore, it makes understanding the forces that influence people’s behavior easier and improves predictions for the future.
Table of contents
- What Is Neuroeconomics?
- Neuroeconomics Explained
- History
- Examples
- Applications
- Neuroeconomics And Behavioral Economics
- Frequently Asked Questions (FAQs)
- Recommended Articles
Key Takeaways
- Neuroeconomics definition refers to a field of study that tries to bridge economics, neuroscience, and psychology. Neuroscience uses several methods, including imaging of brain activity, to derive information about how the brain functions.
- These findings are used to decode why humans make that choice in dealing with economic affairs.
- This field has a wide range of applications, including in areas such as finance consumer behavior and public policy.
- In 2005, researchers from neuroscience, psychology, and economics established the Society for Neuroeconomics as a formal platform for collaboration and idea sharing.
Neuroeconomics Explained
Neuroeconomics is an interdisciplinary field that studies the decision-making patterns of individuals. The area of neuroeconomics is relatively new. Nevertheless, it has supplied evidence to support essential presumptions underlying contemporary Western economic theory. In addition, the impact of human choices is extensively researched, such as how an individual chooses one option and foregoes another in exchange for a greater reward.
In this experimental economics, the human subjects are kept under observation for research purposes and given one or more options. Neuroeconomics research provides a multidisciplinary approach to studying economic decision-making, which can lead to a better understanding of the factors that influence human behavior in economic contexts.
The researchers observe, measure, and record the physiological and biochemical components before and after the patient decides. Moreover, the findings, in short, are used to decode why humans make that choice in dealing with economic affairs. While this field has potential benefits, the disadvantage of neuroeconomics is that it is expensive, time-consuming, and needs more diversity.
So, this provides a valuable framework for understanding how consumers make decisions and can help economists develop more accurate models of consumer behavior.
One of the critical concepts in neuroeconomics is expected utility theory, which proposes that people make decisions based on subjective evaluation of the probabilities and potential outcomes of different choices. Therefore, this means people list the benefits and rank their options according to usefulness. Then, the results could be incorporated into market conditions to promote the same products or services.
Furthermore, this field has a wide range of applications, including in areas such as finance consumer behavior and public policy. Overall, neural economics provides a better framework for knowing the complex interplay between cognitive, emotional, and social factors that impact economic decision-making.
History
The history of neuroeconomics can be divided into two periods: the neoclassical economic revolution of the 1930s and the cognitive neuroscience revolution of the 1990s.
In the United States, “neuroeconomics” initially gained popularity in the late 1990s. The 1980s saw the emergence of experimental and behavioral economics. Moreover, this helped early neural economics investigations by offering well-codified experimental designs and practical economic paradigms to address financial decision-making issues in individual and collaborative contexts.
Since 2005, neuroeconomics has become a rapidly growing field with journals, conferences, and research programs. Therefore, today this field of economics continues to grow and evolve, incorporating new techniques and theories from various fields.
Examples
Let us understand the concept better with the help of an example.
Example #1
Suppose Wandr Company is considering implementing a new pricing strategy for its products. However, the traditional economic approach to pricing would involve conducting a cost-benefit analysis to determine the point that maximizes profits. Besides, a neuroeconomic system would recognize that consumer behavior is not solely based on rational calculations of cost and benefit but is also influenced by emotional and cognitive factors.
Therefore, to apply this approach to pricing, the company could conduct a study to investigate how consumers respond to different price points at a neutral level. For example, the study might reveal that specific price points activate the brain’s reward centers more than others, indicating that consumers may be more willing to pay higher prices for products that they perceive have more excellent value.
Additionally, based on these insights, the company could develop a pricing strategy considering the emotional and cognitive factors influencing consumer behavior. Therefore, the company can set higher prices to take advantage of consumers’ emotional responses to perceived value.
Hence, this example demonstrates how a neural economic approach can complement traditional financial analysis to understand consumer behavior better and inform business decision-making.
Example #2
Suppose a country has both government-operated airlines and privately operated airlines. The news reported that nearly 50% of government airline carriers meet with an accident. Hearing the report, people may panic and prefer using private airlines instead.
However, government airlines meeting 50% accidents do not guarantee the safety of using private airlines. Private airlines may be equally or worse than government airlines. The immediate decisions taken by people may need to be more logical. Such decisions affect the government’s income. This government income is used for various welfare schemes, and the reduction of income may lead to stress on welfare expenditure.
Applications
This field of economics has several practical applications in different areas, some of which include:
- Marketing: Understanding consumers’ purchasing decisions by measuring their neural responses to various products and advertising messages.
- Public policy: Learning how individuals make social and economic policy decisions, such as healthcare and environmental regulations, by determining their brain activity.
- Finance: Investigating how investors make financial decisions by measuring their neural responses to market trends and investment opportunities.
- Investigating The Role Of Incentives: Neural economics can help economists understand how incentives influence behavior and how different types of incentives, for instance, monetary reward and social recognition affect decision-making.
Neuroeconomics And Behavioral Economics
Neuroeconomics is a study that seeks to understand the neural basis of decision-making and behavior. In contrast, behavioral economics studies how psychological, cognitive, emotional, and social aspects affect individuals’ and institutions’ economic decisions.
| Key difference | Neuroeconomics | Behavioral Economics |
|---|---|---|
| Focus | Neural mechanisms underlying decision-making. | Psychological and cognitive factors underlying decision making. |
| Data sources | Brain imaging techniques, such as fMRI and EEG, and biological measures, such as hormones and genetics. | Behavioral experiments, surveys, and field study. |
| Limitations | Expensive and complex data collection and analysis method. | It relies on self-reported and observed behavior, which may not always be accurate. |
| Applications | Marketing, finance, public policy, addiction and mental health, and law. | Public policy, consumer behavior, healthcare, education, and environmental economics. |
Frequently Asked Questions (FAQs)
In neural economics, value refers to the subjective worth or desirability of a good, service, or experience. Decision-making is a primary component of neuroeconomics and is closely linked to reward processing in the brain.
Since it was difficult to attribute the invention of neural economics to a single individual, several scholars played a significant role in its development. One of the earliest pioneers of neural economics was Paul Glimcher, who founded the Center of Neuroeconomics at New York University in 2002. Other prominent scholars were Antonio Rangel, Ernst Fehr, David Laibson, and Daniel Kahneman.
In neural economics, risk refers to the uncertainty associated with a decision- making. Expected value is a crucial factor that impacts decision-making and is closely linked to neuroeconomic decision-making.
Numerous brain areas react to situations with uncertainty or lack of knowledge about rewards’ value, content, or certainty. As a result, they are essential in making economic decisions. These include the lateral prefrontal cortex (LPFC), anterior cingulate cortex (ACC), insular cortex (Ins), and posterior parietal cortex (PPC).
Recommended Articles
This article has been a guide to what is Neuroeconomics. Here, we compare it with behavioral economics and explain its examples, history, and applications. You may also find some useful articles here –
- Heterodox Economics
- Positive Economics
- Evolutionary Economics
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