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Do Economists Need Brains?

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http://www.economist.com/finance/displayst...ory_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 using 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.

Continues at the link.

I didn't think you need a brain to guess, you could merely use a coin.

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The Undercover Economist by Tim Harford has a chapter on the UK 3G license auction. The economists who created it used their understanding of markets and human behaviour to extract a stupidly large amount of cash from the industry.

http://www.amazon.co.uk/Undercover-Economi...0114&sr=8-1

I'm sure you can get by in a lot of professions without using your brain but if you do use it the results can be extraordinary. Unfortunately the cash extracted from the telcos by brainy economists was pumped into the health service etc by brainless ones.

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Economism these days starts to look like "Socio- History" (from Isaak Asimov's "Foundation Trilogy").

A made- up branch of psychology that predicts mass- opinions and the consequences these have, based on formulae typed into calculators.

I used to find that funny, when I read it 20 years ago. Now truth is stranger than fiction.

Cobra

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Well, if we take the economists at Oxford Economics as our sample group (house prices to increase by 25% by 2013), the answer must be no.

Edited by RajD

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Economism these days starts to look like "Socio- History" (from Isaak Asimov's "Foundation Trilogy").

A made- up branch of psychology that predicts mass- opinions and the consequences these have, based on formulae typed into calculators.

I used to find that funny, when I read it 20 years ago. Now truth is stranger than fiction.

Cobra

Funny you say that - I am a sort of economist and recently read the foundation trilogy (I found it excellent).

I think most intelligent economists would recognise that standard economic assumptions do not decribe human behaviour perfectly. Theories from psychology, sociology etc do a good job in some areas. The problem remaining, and nowhere near resolution, is to fit all the bits back to gether again to have general theories that can be applied to policy problems. At the moment we can do this in standard economics, but can't readily do it with these behavioural and neuro branches. Psychohistory from asimov was a general theory (although one based on things a bit different from neuroscience and psychology)

Something for the clever bods at universities to work on...

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  • 395 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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