What is Neuroeconomics? Provide two examples that standard economics failed to explain but the Neuroeconomics can.
The term is a combination of two sciences that, until recently, were thought to not connected. Neuroscience looks at what areas of the brain are stimulated by different activities, and tries to determine connections and see differences where anecdotal evidence would imagine similarities. Economics looks at the behavior of people where money is concerned and tries to understand why people behave the way they do looking at the action and the result. Of course both sciences are much more complicated than this, but when looking at where they intersect these functions matter the most. Neuroeconomics tries to determine the reasons people act in a certain way, based on a stimulus, by using imaging tools such as fMRI, Pet scans, and other imaging software to show which areas of the brain activate during the chosen activity. Neuroeconomics is "the growing field at the intersection of behavioral economics and cognitive neuroscience" (McDermott, 2009), or a field that "focuses on the neurocognitive processes underlying economic decision making and outcome-based decision learning" (Brown & Ridderinkhof, 2009), or "a mathematically rigorous and conceptually complete description of the neural processes which connect sensation and action & #8230; that [has] its roots in economic theory" (Redmond, 2003). All of these definitions of the process of neuroeconomics are simplistic statements regarding the complexity which is the human mind with regard to economic decision making. Examples provide a simpler explanation of the concept.
On issue that is difficult to fully describe using classical economics is how decision making is affected by aging. As Camerer, Loewenstein and Prelec (2004) discuss, as people age they are known to be, as a group, more conservative when making decisions. But, the actual mechanism may be better understood through techniques of neuroscience than simple economics. While, economists can empirically determine that it is a fact that people are more averse to risk as they age, it is impossible without opening the "black box" (Camerer, et al., 2004) to see what the issue actually is. One group of researchers looked at this issue, through the eyes of neuroeconomics, to see what the brain had to say about this phenomenon.
The researchers begin with the assumption that "aging is often accompanied by structural and functional neurocognitive change that may well influence decision making" (Brown & Ridderinkhof, 2009), which they seek to examine through imaging. In a meta-analysis, the researchers determined that "the performance of the older adults in general was altered when compared with that of the younger participants." The researchers admit that there is no conclusive proof that decision making is altered by brain changes as a person gets older, but the studies that have been conducted seem to lean that way. More work needs to be done to prove a connection conclusively, but it is a study that could not have been done prior to the advent of neuroeconomics.
Another area in which brain activity has been able to demonstrate how the mechanism works when determining the economics of a situation is with trust vs. mistrust. Scientists had already discovered devised a method for investigating people's tendencies when it came to the classic "prisoner's dilemma," but they were unable to determine what caused a player to either trust or mistrust their playing partner. In the economic game "each player has an item of worth, but each value's the others' item more than her own. If a player chooses to cooperate, she gives her item to the other player; if she defects she keeps it" (Society for Neuroscience, 2010). Scientists have discovered that the reward function of the brain will activate if the player cooperates, punishes an unfair opponent or donates money to charity (Society for Neuroscience, 2010). Before, scientists could tell what the average person would gain more pleasure from, but they did not completely understand the process until they were able to use imaging techniques.
2. Explain how different lobes of a human brain are interconnected in response to your examples that you suggest for section 1. Which feature(s) of human brain function does work well in these examples?
The example article discusses the lobes of the brain what they do, and how they are interconnected. The two examples above, decision making changes during aging and trust issues when making economic decisions, light up different areas of the brain that are specific to the activities. In the first example, there are actually many areas that come into play for the processing of a decision making necessity. The researchers asked the question whether damage and long use due to age would have any effect in how a decision was made and whether that could be seen via imaging. The research turned out to be vague but promising. The second example had a definite answer as seen on imaging machines.
For both situations, decision making is the primary activity that is being studied, so the areas of the brain will be very similar. For example, Brown and Ridderinkhof (2009) found that
"The dorsal striatum, in particular the caudate nucleus, has been linked extensively to computations of reward prediction error (i.e., the discrepancy between an expected reward and the reward actually received), which are based on calculations of reward probability. Reward prediction error computations in the dorsal striatum play a key role in linking reward to behavior and form the basis of action-contingency learning, the learning of probabilistic action-reward links, and action-oriented decision making, in particular in the selection of actions associated with the greatest possible reward."
In both scenarios, but especially in the trust exercise, the striatum was energized when the person was making the decision. In a more general way, since general decision making is much more complex, the striata is also involved in the first example also. Besides this area "A number of brain areas have been implicated in emotional modulations of decision making, such as the & #8230; anterior cingulate cortex, the amygdala, and the insula" (Brown & Ridderinkhof, 2009). These researchers found research that indicated areas of the brain that were most affected by aging and found that the insula was particularly vulnerable to the aging process. This is caused by a significant loss of "grey matter volume" in that area (Brown & Ridderinkhof, 2009). This is actually a determinant of how much all areas of decision making will be affected. A linear relationship between brain matter loss and aging does not exist in all areas of the brain (though those such as the insula do show this relationship), so it is difficult to determine if individuals are more or less affected by aging or by experiences during their lives (Brown & Ridderinkhof, 2009).
3. What are the key assumptions of neuroeconomics? How do they differ as compared to standard economics?
The field of neuroeconomics seeks to add to the research that has already been done by researchers in classical economics. The key point in neuroeconomics is the addition of neuroscience methods of investigation to the study of economics. Imaging machines can be used to determine what areas of the brain are being utilized to make a particular decision, but that is not the full extent of neuroeconomics.
Researchers realized that their hands were tied to a certain extent by the limitations that existed in research using classical economic theories. Because this was true new theories had to be developed that worked to understand the entire process behind economic decision making. Glimcher (2011, xv) says that economics has been constructed from logical primitives such as utility, supply, demand, and choice. Neuroscience, at the other extreme, has been built from primitives such as brain activations, neurons, synapses and neurotransmitters." This explanation discusses the foundations of the two sciences, and it is difficult to see any possible way that the two could possibly be joined. Classical economics does relate such concepts as how people react to supply and demand, it does talk about choice in the simplest terms (since economics by itself cannot understand all of the mechanisms behind choice), and utility. Glimcher is especially interested in the idea of utility and how it is used by economists. In an article that looks at Glimchers book, Stiller (2011) says that Glimcher;
"Wants to identify brain structures that process key elements of utility theory when people face uncertainty: "(1) subjective value, (2) probability, (3) the product of subjective value and probability (expected subjective value), and (4) a neuro-computational mechanism that selects the element from the choice set that has the highest 'expected subjective value.'"
Some of these ideas have been foundational to economic theory such as probability which goes back to Bayes. Glimcher, a neuroscientist, is making attempts to marry the separate pieces of the two.
So, the key assumptions of neuroeconomics are that mechanisms in brain structure and certain neurotransmitters can be used to explain the premises of standard economics. Because the brain is centrally involved in making choices, determining what the demand for a product…