The Neuro Platform

We all make dozens of economic decisions every day. Should we make a risky investment or play it safe? Should we buy that expensive coffee that we love or try to make it at home? For many many years financial economists assumed that these decisions were just made through logical reasoning and calculation, but it has recently been uncovered that our brains play just as crucial of a role! Here we welcome the world of neuroeconomics, the fascinating intersection between neuroscience and economics that is revolutionising how we understand financial decision making, by taking a look at what goes on in the brain itself.

What is Neuroeconomics

Neuroeconomics sits in between neuroscience, economics and even psychology. Rather than just observing what choices people make, neuroeconomists use tools like functional magnetic resonance imaging (fMRI), and electroencephalography (EEG) to watch what happens in the brain as you decide what to do. This field formally emerged in the 1990s but exploded throughout the 2000s via key publications and the 2002 Princeton meeting (Glimcher et al., 2009). The meeting generated a lot of momentum within neuroeconomics and marked a clear turning point, allowing for the convergence of each respective field.

In the past economic theory was mainly centred around the traditional concept of ‘homo economicus’, the idea that people are represented as ideal decision-makers who are completely rational (Chen, 2019). But decades of research has shown that this model, when applied in real life scenarios is a little flawed. Studies have shown that in risky situations, people consistently seem to violate this concept, and instead face different biases and emotions that cause them to choose seemingly irrational preferences (Kahneman and Tversky, 1979). Neuroeconomics aims to explain why we do this by exploring and mapping the different neural mechanisms that underly these behaviours.

Brain Structure and Economics

A key study ran by a group of researchers from the DPAG (Department of Physiology & Genetics) lab, revealed that when we make economic decisions, the part of our brain most in use is the frontal cortex. This is an area of the brain that is heavily involved in the processes of both decision-making and problem-solving. By engaging with this part of your brain, it helps you plan for the future, weigh multiple options to decide what the best choice might be, and override impulsive desires. Research has found that activity in the prefrontal cortex increases when people make future-oriented choices that lead to long-term gain, compared to when they seek immediate gratification (McClure, 2004).

Meanwhile, deeper brain structures such as the ventral striatum, specifically the nucleus accumbens, are highly involved in incentive motivation, with recent neurobiological research showing that dopaminergic neurons from this brain area is used to code aspects of reward processing (Camara, 2009). This means that these regions are activated and light up in anticipation of a great outcome, whether that be financial gain, food or social approval (Knutson et al., 2001). So next time you feel that surge of excitement thinking about a purchase you are making, remember that it may be your nucleus accumbens pinging!

And finally the amygdala. This small, almond-shaped structure is involved with emotional processing. Studies have shown that when faced with risky decisions and potential financial losses, the amygdala is activated (De Martino, Camerer and Adolphs, 2010). Its involvement helps to explain why certain people are often way more motivated to avoid losses, rather than to pursue risky gains, a phenomenon economists call ‘loss aversion’.

Key Neuroeconomic Findings

One key finding is how humans value rewards over time. Most people have an extremely strong preference towards immediate rewards over delayed ones, even if waiting for the delayed one meant that the reward was of more value. This is called ‘temporal discounting’ and can have many implications on savings, health and long-term planning. Research has revealed that immediate rewards seem to activate the limbic system, which is the more emotional and impulsive part of our brain, whilst delayed rewards activate our prefrontal cortex, the thoughtful, planning brain (McClure, 2004). Economic decisions can often be seen to be a competition between these systems. If the limbic system wins, we choose the rewards right in front of us, but when the prefrontal cortex has control, we evaluate our choices more and choose delayed gratification.

It has also been found that surprisingly, humans are not purely self-interested. We care a lot more than it may seem about fairness, reciprocity, and how others may feel, even when it may be at a personal cost. Neuroeconomic games such as the ultimatum game has demonstrated this. In this game, 2 players split some money, with only 1 of those players deciding how much the split will be. The remaining player can then choose to accept the sum of money being offered to them or refuse it and leave with a grand total of nothing. Results from fMRI imaging during these games have shown that when an unfair split or offer is made, the anterior insula, which is associated with disgust and negative emotions is activated, and players often refuse the offer (Sanfey et al., 2003). When these offers are rejected there seems to be an even larger increase in the activity of this brain region, showing how linked emotion and logical decision-making can be. These findings suggest that our social preferences and idea of fairness are not just learned cultural norms, but are supported by specific neural mechanisms that are constantly evolving.

Why Does This All Matter

Understanding the neural basis of economic decision-making has many practical implications. It can help to explain why people struggle with addiction, debt, or other financial self-control problems, and these insights can continue to influence businesses by improving marketing strategies and allowing for better product design. In finance, understanding individual brain structure, and how neural function is connected to decision-making, can be used to improve future investment strategies (Shiv et al., 2005).

Despite neuroeconomics still being an emerging field, one thing is clear. We are not just rational beings that make logical decisions the same way a calculator does. We are emotional creatures with ever-evolving brains that more often than not, cause us to make weird or wonderful choices! By understanding the neural basis behind each economic decision, we can all hope to make better personal decisions with our hard-earned money.

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References:

Camara, E. (2009). Reward networks in the brain as captured by connectivity measures. Frontiers in Neuroscience, 3(3), pp.350–362. doi:https://doi.org/10.3389/neuro.01.034.2009.

Chen, J. (2019). Homo Economicus Definition. [online] Investopedia. Available at:https://www.investopedia.com/terms/h/homoeconomicus.asp.

De Martino, B., Camerer, C.F. and Adolphs, R. (2010). Amygdala damage eliminates monetary loss aversion. Proceedings of the National Academy of Sciences, [online] 107(8), pp.3788–3792. doi:https://doi.org/10.1073/pnas.0910230107.

Glimcher, P.W., Camerer, C.F., Fehr, E. and Poldrack, R.A. (2009). Introduction. Elsevier eBooks, pp.1–12. doi:https://doi.org/10.1016/b978-0-12-374176-9.00001-4.

Kahneman, D. and Tversky, A. (1979). Prospect theory: an Analysis of Decision Under Risk. Econometrica, 47(2), pp.263–292. doi:https://doi.org/10.2307/1914185.

Knutson, B., Adams, C.M., Fong, G.W. and Hommer, D. (2001). Anticipation of Increasing Monetary Reward Selectively Recruits Nucleus Accumbens. The Journal of Neuroscience, 21(16), pp.RC159–RC159. doi:https://doi.org/10.1523/jneurosci.21-16-j0002.2001.

McClure, S.M. (2004). Separate Neural Systems Value Immediate and Delayed Monetary Rewards. Science, 306(5695), pp.503–507. doi:https://doi.org/10.1126/science.1100907.

Sanfey, A.G., Rilling, J.K., Aronson, J.A., Nystrom, L.E. and Cohen, J.D. (2003). The neural basis of economic decision-making in the ultimatum game. Science, 300(5626), pp.1755–1758. doi:https://doi.org/10.1126/science.1082976.

Shiv, B., Loewenstein, G., Bechara, A., Damasio, H. and Damasio, A.R. (2005). Investment behavior and the negative side of emotion. Psychological Science, [online] 16(6), pp.435–439. doi:https://doi.org/10.1111/j.0956-7976.2005.01553.x.