Neuroeconomics 101

8 min readFeb 15, 2024

The combination of economics, neuroscience, and psychology to determine how individuals make economic decisions.

I find that I enjoy writing about new topics/themes that I discover as I surf this wonderful thing we know as the internet. So, let’s talk about Neuroeconomics!

https://www.brainfacts.org/neuroscience-in-society/law-economics-and-ethics/2018/neuroeconomics-making-big-and-small-decisions

WHAT IS NEUROECONOMICS?

Neuroeconomics is the study of human decision-making in the context of economic choices. This form of economics attempts to combine the understanding of neuroscience and psychology to achieve a better grasp of economic decision-making. Our past has taught us that people do not always make choices based on their financial capabilities or employ rationale. This reality has piqued the interest of a generation of economists to develop a multidisciplinary field that employs the scientific disciplines of neuroscience, psychology, and economics.

This field analyzes brain activity using numerous medical procedures to achieve accurate imagery of the brain and complementary biochemical tests carried out during and after a consumer makes an economic choice.

ORIGIN STORY

The fundamental question “How can human societies, based on people who are fundamentally selfish-function properly?” is a theme that is recurring in every aspect of philosophy. I found this phrase to iterate how dynamic human interaction with their environment is — man is usually found not in isolation but in society. Hence, there must be something that ensures the stability of social arrangements. Since there was no illusion about the fundamentally selfish nature of man, some corrective factor (man-made or natural) must intervene.

The Fundamentals of Economic Theory developed with the belief that an economist would never possess enough understanding of a human’s thought process behind a particular choice. But as science progressed, we found another way to look at the brain — a biochemical way to help us to understand how biology affects a person’s choices. Now, Neuroeconomics comes into the picture as it tries to connect consumers’ biology to their choices.

UNDERSTANDING NEUROECONOMICS

The study of neuroeconomics aims to fill gaps in the conventional theories of economics. These gaps predominantly exist in the philosophy behind the economic theories.

Theories of Conventional economics rely on and generate an emphasis on a materialistic, value-oriented lifestyle. According to such theories, the health of an economy is almost guaranteed through healthy competition — which although achievable is riddled with exceptions. Based on this fact, most economic decisions are based on rational choice theory. This theory suggests that investors will always, always objectively evaluate risk and chart their next course of action in the most rational manner. But, this theory also sheds some light on how a decision maker’s mind is treated as an independent aspect, separate from the scope of economic understanding and therefore a variable to be studied at length.

This impasse was overcome by applying insights from psychology to instances where the population does not appear or tends to conform to rational choices. Enter Behavioral economics.

Neuroeconomics takes the next step to understand the relationship between economic decisions and the observable behavior of the human brain. This allows us to appreciate the fact that the brain is composed of multiple systems that interact and lead to a unique choice.

RESEARCH

Experimental Economics is the most closely related field to Neuroeconomics. Research primarily consists of observational studies on the behavior exhibited by a human being or an animal population when one is given options to choose from — the numerical nature of options genuinely leads to unique and subjective behaviors i.e. confusion generally. For instance, I remember how flustered I used to get as a child when I walked into a video game store.

This behavior is observed, measured, and recorded through numerous physiological and biochemical variables. They are noted before, during, and after the choice has been made to establish time as a metric of observation. Experiments are fine-tuned to note the change in the brain function through electromagnetic imaging and finally, the choices are compared to identify a possible relationship. This research is carried out through magnetic resonance imaging (MRI) scans or positron emission tomography (PET) scans which observe blood flow and activity in different regions of the brain (the biology part of neuroeconomics). Blood and saliva tests are leveraged to measure neurotransmitters — a chemical substance that serves as a medium to transmit electrical impulses between nerve cells or neurons, neurotransmitter levels.

WHAT DID I LEARN?

Before I share that, I understand many of these learnings are obvious to many… it was to me as well. But the mere fact that my observations have a logical basis is an empowering feeling.

For example, history has shown the perpetuation of asset bubbles and financial crises. Neuroeconomics provides insight into why humans might not act to optimize utility and avoid financial difficulty. Typically, emotions profoundly influence individuals’ decision-making. The brain often reacts more to losses than to gains. This postulate leaves enough wiggle room for a consumer to make irrational behavior — irrational to the neuroeconomist but perhaps rational to the person. While emotional responses are not always suboptimal, they are rarely consistent with the concept of rationality. As neuroeconomics becomes a better science, it shows the potential to improve the understanding of the mechanisms influencing decision-making.

*Although the possibility of a connection exists many do not feel that such a relationship can ever be understood or found.* https://www.fincash.com/l/basics/neuroeconomics

AREAS OF STUDY

Neuroeconomics today remains very much experimental. Although the possibility of a connection exists many do not feel that such a relationship can ever be understood or found. So, let us see the three distinct fields of study that Neurocoeonimcs employs to make a compelling case that — Economic choices are a function of human nature.

Intertemporal Choice

Intertemporal implies a relationship between past, present, and future events. For instance, the importance of an air conditioner unit grows in value during the onset of summer and loses its importance while nearing the winter seasons. People’s choices are also dependent on this simple cycle resulting from ‘how important?’ in various instances. By studying the possible connection of this cycle at a larger scale, Neuroeconomics seeks to understand and define the brain activity that might or is influenced by time and the impulsive nature to buy.

Social Decision-Making

Game Theory is a mathematical model that seeks to understand the dependent nature of a certain entity on other actions and choices of its neighbors. In social decision-making, the game theory involves and considers interactions, observations, and influence of a human brain from trusted ones, advertisements for instance. Game Theory applies models of conflict and cooperation between individuals who are expected or seen as rational and independent decision-makers of a family, the smallest economic unit. The priority of social choices is seen as a product of trust, fairness, and the human need to reciprocate acts of kindness in ways that define future economic choices.

Choices made under Risk and Uncertainty resulting from

Studies conducted aim to ascertain the cause of a choice. Such studies must adapt to choices taken under duress (risk or uncertainty) and must consider possible options and variables involved in the decision-makers choice — causes of duress may also be from a source that the decision-makers themselves could be unaware of during this time. Generally, studies show that humans wish to minimize the possibility of risk, and the lack of enough and accurate information indeed affects the human brain and its nervous system in extension, a consumer’s decision.

IMPORTANCE OF NEUROECONOMICS

The most important aspect of a field of study is its importance in society. So, let us start with how is Neuroeconomics useful to a business?

Firstly, neuroeconomics understands and explores how a brain processes. Doing so allows us to ask some very important questions in the world of business. How can we make the best decision? How can we identify the most productive parts of the brain? How can we encourage the brain to be creative?

Now, let’s talk about the benefits. Gaining a better understanding of how humans make decisions is beneficial for everyone. This allows Neuroeconomics the ability to improve the accuracy of existing theories, by considering factors such as social, cognitive, and emotional variables that are present in the decision-making process.

Why Has Neuroeconomics Impacted Economics More Than Psychology?

Neuroeconomics resembles the bridge that connects neuroscience, psychology, and economics. From this fact, it becomes clear neuroscientific discoveries stand to inform and guide, but most importantly place limitations on the existing economic model. That is why neuroscience has made a larger impact on the way we see and understand the economy.

An interesting case — Could a more adept understanding of neuroeconomics help boost the world economy?https://insights.som.yale.edu/insights/what-is-neuroeconomics

WHAT’S NEXT?

The most important development in human society has been the ability to read and understand the massive amount of data that is generated daily by simple and mundane, to complex and important actions carried out by individuals. Neuroeconomics simply provides a new data set that is to be factored in with theoretical, empirical, and experimental research into human behavior.

Human behavior has always puzzled us. From the beginning of Plato’s Cave, A.O Hume’s foundation of logic, morals, criticism, and politics to understand human decision-making. This variation in models to truly represent human behavior though interesting fails to help conventional economic theories. So, how do we choose a model that satisfactorily supports the modern economic environment?

Neuroeconomics is the answer.

Human behavior will always remain a function of definite and random factors. However, it behooves us to understand that in the long run, the health of our world’s economy is an outcome of the collective choices of every individual. This requires us to further neuroeconomics to understand how we as a species choose, make decisions, and weigh pros and cons which in the long run stand to benefit consumers and the market alike. From better company decisions to more educated and informed consumers — Good choices will ensure a better environment in the market, fostering a need for better products and new jobs… and thereby

A better way of life.

Neuroeconomics stands to provide a unified model, a model to understand ourselves better.

I hope you enjoy knowing about Neuroeconomics as much as I did. As someone who is getting into a daily habit of writing, I am open to critique and suggestions on how to improve!

Learn something new on the internet!