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Do economists need brains?
Jul 24th 2008 | NEW YORK
From The Economist print edition
http://www.economist.com/finance/displaystory.cfm?story_id=11785391

A new school of economists is controversially turning to neuroscience to
improve the dismal science


FOR all the undoubted wit of their neuroscience-inspired concept album, "Heavy
Mental"-songs include "Mind-Body Problem" and "All in a Nut"-The Amygdaloids
are unlikely to loom large in the annals of rock and roll. Yet when the history
of economics is finally written, Joseph LeDoux, the New York band's
singer-guitarist, may deserve at least a footnote. In 1996 Mr LeDoux, who by
day is a professor of neuroscience at New York University, published a book,
"The Emotional Brain: The Mysterious Underpinnings of Emotional Life", that
helped to inspire what is today one of the liveliest and most controversial
areas of economic research: neuroeconomics.

In the late 1990s a generation of academic economists had their eyes opened by
Mr LeDoux's and other accounts of how studies of the brain using recently
developed techniques such as magnetic resonance imaging (MRI) showed that
different bits of the old grey matter are associated with different sorts of
emotional and decision-making activity. The amygdalas are an example.
Neuroscientists have shown that these almond-shaped clusters of neurons deep
inside the medial temporal lobes play a key role in the formation of emotional
responses such as fear.

These new neuroeconomists saw that it might be possible to move economics away
from its simplified model of rational, self-interested, utility-maximising
decision-making. Instead of hypothesising about Homo economicus, they could
base their research on what actually goes on inside the head of Homo sapiens.
The dismal science had already been edging in that direction thanks to
behavioural economics. Since the 1980s researchers in this branch of the
discipline had used insights from psychology to develop more "realistic" models
of individual decision-making, in which people often did things that were not
in their best interests. But neuroeconomics had the potential, some believed,
to go further and to embed economics in the chemical processes taking place in
the brain.

Early successes for neuroeconomists came from using neuroscience to shed light
on some of the apparent flaws in H. economicus noted by the behaviouralists.
One much-cited example is the "ultimatum game", in which one player proposes a
division of a sum of money between himself and a second player. The other
player must either accept or reject the offer. If he rejects it, neither gets
a penny.

According to standard economic theory, as long as the first player offers the
second any money at all, his proposal will be accepted, because the second
player prefers something to nothing. In experiments, however, behavioural
economists found that the second player often turned down low offers-perhaps,
they suggested, to punish the first player for proposing an unfair split.

Neuroeconomists have tried to explain this seemingly irrational behaviour by us
ing an "active MRI". In MRIs used in medicine the patient simply lies still
during the procedure; in active MRIs, participants are expected to answer
economic questions while blood flows in the brain are scrutinised to see where
activity is going on while decisions are made. They found that rejecting a low
offer in the ultimatum game tended to be associated with high levels of
activity in the dorsal stratium, a part of the brain that neuroscience suggests
is involved in reward and punishment decisions, providing some support to the
behavioural theories.

As well as the ultimatum game, neuroeconomists have focused on such issues as
people's reasons for trusting one another, apparently irrational risk-taking,
the relative valuation of short- and long-term costs and benefits, altruistic
or charitable behaviour, and addiction. Releases of dopamine, the brain's
pleasure chemical, may indicate economic utility or value, they say. There is
also growing interest in new evidence from neuroscience that tentatively
suggests that two conditions of the brain compete in decision-making: a cold,
objective state and a hot, emotional state in which the ability to make
sensible trade-offs disappears. The potential interactions between these two
brain states are ideal subjects for economic modelling.

Already, neuroeconomics is giving many economists a dopamine rush. For example,
Colin Camerer of the California Institute of Technology, a leading centre of
research in neuroeconomics, believes that incorporating insights from
neuroscience could transform economics, by providing a much better
understanding of everything from people's reactions to advertising to decisions
to go on strike. At the same time, Mr Camerer thinks economics has the
potential to improve neuroscience, for instance by introducing neuroscientists
to sophisticated game theory. "The neuroscientist's idea of a game is rock,
paper, scissors, which is zero-sum, whereas economists have focused on
strategic games that produce gains through collaboration." Herbert Gintis of
the Sante Fe Institute has even higher hopes that breakthroughs in neuroscience
will help bring about the integration of all the behavioural sciences-
economics, psychology, anthropology, sociology, political science and biology
relating to human and animal behaviour-around a common, brain-based model of
how people take decisions.

Mindless criticism

However, not everyone is convinced. The fiercest attack on neuroeconomics, and
indeed behavioural economics, has come from two economists at Princeton
University, Faruk Gul and Wolfgang Pesendorfer. In an article in 2005, "The
Case for Mindless Economics", they argued that neuroscience could not transform
economics because what goes on inside the brain is irrelevant to the
discipline. What matters are the decisions people take-in the jargon, their
"revealed preferences"- not the process by which they reach them. For the
purposes of understanding how society copes with the consequences of those
decisions, the assumption of rational utility-maximisation works just fine.

But today's neuroeconomists are not the first dismal scientists to dream of
peering inside the human brain. In 1881, a few years after William Jevons
argued that the functioning of the brain's black box would not be known,
Francis Edgeworth proposed the creation of a "hedonimeter", which would measure
the utility that each individual gained from his decisions. "From moment to
moment the hedonimeter varies; the delicate index now flickering with the
flutter of the passions, now steadied by intellectual activity, low sunk whole
hours in the neighbourhood of zero, or momentarily springing up towards
infinity," he wrote, poetically for an economist.

This is "equivalent to neuroeconomics' brain scan," notes David Colander, an
economist at Middlebury College in Vermont, in an article last year in the
Journal of Economic Perspectives, "Edgeworth's Hedonimeter and the Quest to
Measure Utility". Later economists such as Irving Fisher, Frank Ramsey (who
proposed a utility-measuring machine called a "psychogalvanometer") and
Friedrich von Hayek would discuss the role of the complex inner workings of the
brain. Hayek cited early advances in neuroscience to explain why each
individual has a unique perspective on the world.

The reason why economists in the late 19th century and much of the 20th put the
rational utility-maximising individual at the heart of their models was not
that they thought that economics should avoid looking into the brain, but
because they lacked the technical means to do so, says Mr Colander. "Economics
became a deductive science because we didn't have the tools to gather
information inductively. Now, better statistical tools and neuroscience are
opening up the possibility that economics can become an abductive science that
combines elements of deductive and inductive reasoning."

The big question now is whether the tools of neuroscience will allow economics
to fulfil Edgeworth's vision-or, if that is too much to ask, at least to be
grounded in the physical reality of the brain. Studies in the first decade of
neuroeconomics relied heavily on active MRI scans. Economists' initial
excitement at being able to enliven their seminars with pictures of parts of
the brain lighting up in response to different experiments (so much more
interesting than the usual equations) has led to a recognition of the limits of
MRIs. "Curiosity about neuroscience among economists has outstripped what we
have to say, for now," admits Mr Camerer.

A standard MRI identifies activity in too large a section of the brain to
support much more than loose correlations. "Blood flow is an indirect measure
of what goes on in the head, a blunt instrument," concedes Kevin McCabe, a
neuroeconomist at George Mason University. Increasingly, neuroscientists are
looking for clearer answers by analysing individual neurons, which is possible
only with invasive techniques-such as sticking a needle into the brain. For
economists, this "involves risks that clearly outweigh the benefits," admits
Mr McCabe. Most invasive brain research is carried out on rats and monkeys
which, though they have similar dopamine-based incentive systems, lack the
decision-making sophistication of most humans.

One new technique being used by some neuroeconomists is transcranial magnetic
stimulation, in which a coil held next to the head issues a low-level magnetic
pulse that temporarily disrupts activity in a certain part of the brain, to see
if that changes the subject's preferences-for example, for a particular food
and how much he is willing to pay for it. However, this tool, too, has only
limited applicability, as it cannot get at the central temporal node of the
brain where much basic reward activity takes place.

Still, Mr Camerer is confident that neuroeconomics will deliver its first big
breakthroughs within five years. Likewise, Mr McCabe sees growing
sophistication in neuroeconomic research. For the past four years, a group of
leading neuroeconomists and neuroscientists has met to refine questions about
the brain and economic behaviour. Researchers trained in both neuroscience and
economics are entering the field. They are asking more sophisticated questions
than the first generation "spots on brains" experiments, says Mr McCabe, such
as "how these spots would change with different economic variables." He expects
that within a few years neuroeconomics will have uncovered enough about the
interactions between what goes on in people's brains and the outside world to
start to shape the public-policy agenda-though it is too early to say how.

The success of neuroeconomics need not mean that behavioural economics will
inevitably triumph over an economics based on rationality. Indeed, many
behavioural economists are extremely pessimistic about the chances that brain
studies will deliver any useful insights, points out Mr Camerer with regret.

However, Daniel Kahneman, a Princeton University psychologist who in 2002 won
the Nobel prize in economics for his contribution to behavioural economics, is
an enthusiastic supporter of the new field. "In many areas of economics, it
will dominate, because it works," says Mr Kahneman.

Even so, "we are nowhere near the demise of traditional neoclassical economics,
" he argues. Instead, insights from brain studies may enable orthodox
economists to develop a richer definition of rationality. "These traditional
economists may be more impressed by brain evidence than evidence from
psychology," he says; "when you talk about biology either in an evolutionary or
physical sense, you feel they have greater comfort levels than when you start
to talk about psychology."

In this respect, Mr Kahneman's Princeton colleagues and neuroscience-bashers
may be making a mistake in bundling behavioural economics-soft mind science-and
neuroeconomics-hard biology-together. "It is far easier to argue for mindless
economics than for brainless economics," he says.


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