What is Neuroeconomics?

How utilising the power of fMRI and EEG techniques can help us to better understand why we make irrational decisions

Neuroeconomics is a relatively new interdisciplinary field of study that seeks to understand the neural processes underlying economic decision-making. It combines principles and methods from neuroscience, psychology, and economics to gain insights into how people make choices in situations that involve trade-offs between costs and benefits. The field of neuroeconomics emerged in the 1990s, and since then, it has grown rapidly. Researchers in this field use a variety of techniques, including functional magnetic resonance imaging (fMRI), electroencephalography (EEG), and behavioural experiments, to study how the brain processes information related to economic decision-making.

One of the fundamental questions that neuroeconomics seeks to answer is how people assign value to different options. For example, when we make decisions about whether to buy a particular product, we consider factors such as its price, quality, and brand reputation. Neuroeconomists study how the brain integrates these different pieces of information to arrive at a decision. It also examines the neural mechanisms underlying risky decision-making. When making decisions under uncertainty, people must weigh the potential gains and losses associated with different options. Neuroeconomists study how the brain evaluates the expected value of different options and how it factors in the risk of each option to arrive at a decision. One of the key insights from neuroeconomics is that people often make decisions that are not strictly rational. Rather than always choosing the option that maximises their expected utility, people often make choices based on emotions, heuristics, and biases. For example, people may be willing to pay more for a product if they perceive it to be of higher quality, even if there is no objective evidence to support this belief. In addition to studying individual decision-making, neuroeconomics also investigates social decision-making. For example, researchers in this field have studied how the brain processes information about social norms and how people make decisions in social dilemmas, such as the prisoner's dilemma game.

[Standard economics usually assumes that the Homo Economicus always makes strictly rational decisions which maximise their utility; in reality, people often make choices based on emotions, heuristics and cognitive biases. Photo: Jesus Gil Hernandez]

The findings from neuroeconomics have important implications for a wide range of fields, including finance, marketing, and public policy. Marketers can use insights from neuroeconomics to design products and advertising campaigns that appeal to consumers' emotional and social needs. Policymakers can use these insights to design policies that encourage people to make better decisions, such as by providing information in a more salient and easily understandable way. In finance, neuroeconomics can help investors and traders understand how cognitive biases and emotions can influence market behaviour and investment decisions. However, despite the rapid progress in the field, there are still many questions that remain unanswered. For example, researchers are still working to understand how the brain processes complex social information and how it integrates information across different domains, such as emotions and cognition. Despite its many benefits, neuroeconomics is still a relatively young field, and there is much we still don't know about how the brain influences decision-making. However, as our understanding of the brain continues to advance, we can expect neuroeconomics to play an increasingly important role in shaping our understanding of human behaviour and informing our decisions in a wide range of contexts.

Sources

- Camerer, C., Loewenstein, G. & Prelec, D. (2005). Neuroeconomics: How Neuroscience Can Inform Economics Journal of Economic Literature, Vol. 43, No. 1. [online] available at:https://www.aeaweb.org/articles?id=10.1257/0022051053737843

- Cohen, J. (2010). What is Neuroeconomics? Yale School of Management: Yale [online] available at:https://insights.som.yale.edu/insights/what-is-neuroeconomics

- Society for Neuroeconomics. (2023). About SNE [online] available at: https://neuroeconomics.org/

- Ullrich, R. (2015). An Introduction to Neuroeconomics and Its Impact on Financial Decision Making Chartered Financial Accountant Institute [online] available at:https://www.cfainstitute.org/en/research/multimedia/2015/an-introduction-to-neuroeconomics-and-its-impact-on-financial-decision-making

- World Economic Forum. (2016). Everything you need you know about Neuroeconomics [online] available at:https://www.weforum.org/agenda/2016/10/everything-you-need-to-know-about-neuroeconomics/