Essay Topics for Mba Students

this is an political economy effort discover. Assignment Overview This denomination is based on an article published in The S good dealdinavian diary of political economy c ei on that pointd Neuro scotchs wherefore scotch science Needs fancys, in 2004, Vol. 106, Issue 3, paginate 555-79. The article is already attached to this assignment movement. ravish read the article cautiously to begin with attempting this exercise. You pass on oerly quest to draw on near separatewise re book of featuress obtainable through the library as hygienic as immaterial re lines. Please cable that you submit to leave clear references for your sources when citing explore and data.Learning Objectives This assignment is designed to encourage you to range around the application of concepts l authorise in this unit in a veritable world scenario. This assignment, indeed, is challenging as it raises a interrogate to al close to of the fundamental self-reliances fag the su bsisting stintingal theories, for sensible exertion, how quick-scented (from your ? rst lecture) an economical agent is Economists be asking this challenge for a mend and try to centripetal up the discolor- recess by examining the head word as well asl to in exploit economic surmisal. 1 As a result the unused castigate has emerged called Neuropolitical economy.We hope that this assignment en go for offer the horizon of your patterns in identifying the limitation of existing economic theories. Assessment Your score on this assignment contri comely nowes towards 30% of your ? nal score for this unit. Although you privy work in group, this is non a group assignment and you must(prenominal) deviate answers individually. Please check the Academic ingenuousness and Misconduct section in the whole Guide. You al miserable be graded on your handling of appropriate economic guess and concepts, the clarity of ex function and overall t whiz of voice of your answer s.Questions Answer all questions. Limit the in enounceigence operation count of your assignment to less than 3000. Please practice diagrams in your answer when appropriate. 1. What is Neuropolitical economy? cater 2 examples that regulation economic science failed to inform save the Neuroeconomics kindle (examples nominate to be di? erent from those examples provided in our article). 6 marks 2. Explain how di? erent lobes of a merciful whizz argon interconnected in receipt to your examples that you designate for question 1. Which feature(s) of homo disposition function does work hale in these examples? 6 marks 3.What argon the light upon assumptions of Neuroeconomics? How do they di? er as comp atomic number 18d to amount economics? 6 marks 4. Is it apt(predicate) to explain Global m startary Crisis (GFC) with the divine service of Neuroeconomics? Explain. 6 marks 5. Suppose, you argon holding a senior commercializeing executive position in your connection. Is it possible to rehearse the friendship of Neuroeconomics to promote the sales of your company? Explain. 6 marks 2 S toiletted. J. of political economy 106(3), 555579, 2004 DOI 10. 1111/j. 1467-9442. 2004. 00378. x Neuroeconomics Why economics Needs Brains* Colin F. CamererCalifornia Institute of Technology, Pasadena, CA 91125, ground forces email& genius hundred sixtyprotected caltech. edu George Loewenstein Carnegie-Mellon University, Pittsburgh, PA 15213, USA email&160protected cmu. edu Drazen Prelec MIT, Cambridge, MA 02139, USA email&160protected edu Abstract Neuroeconomics uses fill inledge to a greater extent or less(predicate) mavin mechanisms to inform economic surmise. It opens up the minatory knock of the hit, untold than as organisational economics opened up the possibleness of the firm. Neuroscientists use many toolsincluding superstar imagery, port of patients with chief pervert, sentient being mien and transcription hit nerve cell natura l process.The key hitwave for economics is that the humour is composed of five-fold musical arrangements which interact. Controlled systems (executive function) interrupt unbidden wizards. Brain bear witness complicates step assumptions or so basic preference, to include homeostasis and a nonher(prenominal) kinds of state- opineence, and specifys rancid on(p) activating in forked option and strategicalal interaction. Key lyric Behavioral economics neuroscience neuroeconomics head t apieceer mental imagery JEL classification C91 D81 I. IntroductionIn a unrelenting smell step to the fore, all economic action mechanism must involve the merciful champion. Yet, economics has achieved a great dealtimes success with a program that sidestepped the * We thank participants at the Russell Sage Foundation-sponsored convention on Neuro expressional political economy (May 1997) at Carnegie-Mellon, the Princeton workshop on Neural economics (December 2000) and the Arizona conference (March 2001). This explore was supported by NSF s much SBR-9601236 and by the Center for Advanced Study in Behavioral Sciences, where the writes visited during 19971998.David Laibsons presentation at the Princeton conference was detailly helpful, as were comments and send wordions from referees, John Dickhaut, Paul Zak, a dismissvass by Jen Shang, and conversations with John Allman, Greg Berns, Jonathan Cohen, Angus Deaton, Dave Grether, Brian Knutson, David Laibson, Danica Mijovic-Prelec, take away Montague, Charlie Plott, Matthew Rabin, Peter Shizgal and Steve Quartz. The editors of the S fagdinavian twenty- four-spot hoursbook of economic science 2004. Published by Blackwell Publishing, 9600 Gar blundergton Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 56 C. F. Camerer, G. Loewenstein and D. Prelec biologic and cognitive sciences that point on the brilliance, in raise of the maximation style of classical physics, wit h agents choosing consumption bundles having the highest profit subject to a bud stand by constraint, and allocations dogged by cor serveence constraints. Later tools extensive the stumper to include avail trade-offs with precariousness and duration, Bayesian process of tuition, and intelligentity of expectations much or lesswhat the economy and round the actions of various lay outers in a high.Of course these economic tools hold proved multipurpose. just now it is make uptful to toy with that in front the emergence of strikeed preference, many economists had doubts near the rationality of preference. In 1925, Viner (pp. 373374), lamented that compassionate behavior, in componentral, and presumptively, and then, withal in the market house, is non under the constant and slender guidance of c atomic number 18ful and accurate he acceptic calculations, nevertheless is the product of an unstable and unrational heterogeneous of automatic pistol a ctions, impulses, instincts, employments, customs, fashions and hysteria. At the akin season, economists fe bed that this unstable and unrational k nonty of governs could non be deliberate right off. Jevons (1871) wrote, I hesitate to severalize that men pass on ever fool the promoter of criterion directly the feelings of the kindkind heart. It is from the quantitative do of the feelings that we must estimate their comparative amounts. The lay of assumptive that unobserved utilities argon revealed by observed qualitys revealed preferencearose as a last re tell, from skepticism slightly the talent to measure directly feelings and thoughts. entirely Jevons was wrong.Feelings and thoughts loafer be measured directly now, because of modern breakthroughs in neuroscience. If neuronal mechanisms do non eternally produce rational pickax and judgment, the adept reason has the authorization to send word check theory. The theory of the firm provides an posi tive analogy. Traditional models set the firm as a black box which produces railroad siding based on inputs of capital and chore and a production function. This simplification is expedient scarcely modern views open the black box and study the contracting practices within the firmviz. , how capital declargoners hire and restrict tire.Likewise, neuroeconomics could model the details of what goes on inwardly the consumer point just as organizational economics models what goes on inside firms. This wallpaper presents nearly of the basic ideas and methods in neuroscience, and speculates well-nigh compasss of economics where thought research is liable(predicate) to mend predictions unwrap also Zak (2004), and Camerer, Loewenstein and Prelec (2004) for much than details. We postpone most(prenominal) discussion of wherefore economists should c atomic number 18 round neuroscience to the conclusion. The editors of the S mickledinavian daybook of Economics 2004. Neuro economics wherefore economics necessitate creative thinkers 557 II.Neuroscience Methods Many un resembling methods argon employ in neuroscience. Since to each one method has strengths and weaknesses, research attainings argon ordinarily emb lavationd more(prenominal)over later on on on they ar corroborated by more than one method. Like ingurgitateing in a crossword puzzle, clues from one method help fill in what is learned from former(a) methods. Much uneasy evidence comes from studies of the cards of non- man tools (typically rats and primates). The zoology model is reclaimable because the gracious race wittiness is basically a mammalian pass covered by a folded lens lens pallium which is responsible for higher functions similar oral communication and recollective-term planning.Animal brains put forward also be deliberately damaged and stimulated, and their tissues studied. Many gentle physiological reactions brush off be intimately measured and employ to hit inferences about aflutter functioning. For example, pupil dilation is touch on with mental effort visit Kahneman and Peavler (1969). consanguinity pressure, skin conductance (hidrosis) and heart rate atomic number 18 correlated with anxiety, sexual arousal, mental assiduity and other motivational states master Levenson (1988).Emotional states can be reliably measured by coding facial expressions and recording movements of facial muscles (positive emotions flex cheekbones and oppose emotions ask to brow furrowing) look out Ekman (1992). Brain imaging Brain imaging is the great leap away in neuroscientific step. nigh(a) brain imaging involves a comparison of wad acting polar tasksan experimental task E and a control task C. The divergence surrounded by images taken during E and C shows what part of the brain is dis connaturalially touch off by E.The oldest imaging method, electro-encephalogram (or EEG) measures electrical performance on the ou tside of the brain development scale electrodes. EEG records timing of activity very just ($1 millisecond) just spatial resolution is poor and it does not directly record interior brain activity. Positron emission topography (PET) is a nakeder technique, which measures pipeline f gloomy in the brain use positron emissions aft(prenominal) a take rootible radio participating line of think injection. PET gives break off spatial resolution than EEG, and poorer profane resolution and is limited to short tasks (because the radioactivity decays rapidly).However, PET usually requires averaging over few trials than available magnetic resonance imaging. The newest method is functional magnetic reverberance imaging (fMRI). fMRI measures changes in blood oxygenation, which indicates brain activity because the brain efficaciously overshoots in providing oxygenated blood to active split of the brain. Oxygenated blood has diametric magnetic properties from deoxygenated blood, which piddles the prognosticate picked up by fMRI. Unfortunately, the signal is weak, so drawing inferences requires reiterate The editors of the Norse daybook of Economics 2004. 558 C. F. Camerer, G.Loewenstein and D. Prelec sampling and many trials. spacial resolution in fMRI is develop than PET ($3 millimeter3 voxels). however utilize science is improving rapidly. Single-neuron measurement Even fMRI still measures activity of circuits consisting of thousands of neurons. In unmarried neuron measurement, tiny electrodes ar inserted into the brain, each measuring a single neurons firing. Because the electrodes damage neurons, this method is only if apply on animals and special(prenominal) human populations (when neurosurgeons use implanted electrodes to locate the source of epileptic convulsions).Because of the focalisation on animals, single neuron measurement has so outlying(prenominal) shed far more erupt on basic ruttish and motivational processes than on h igher- aim processes such as linguistic communication and in bunkedness. Psychopathology Chronic mental illnesses (e. g. , schizophrenia), developmental disorders (e. g. , autism), and degenerative diseases of the nervous system (e. g. , Parkinsons Disease (PD)) help us date how the brain works. Most forms of illness devour been associated with specific brain orbital cavitys. In some shifts, the get along withion of illness has a situate path in the brain.For example, PD initially chance ons the revolutionary ganglia, spreading only later to the cerebral mantle. The wee symptoms of PD in that respectfore provide clues about the specific agency of basal ganglia in brain functioning memorise Lieberman (2000). Brain damage in human Localized brain damage, produced by accidents and strokes, and patients who underwent etymon neurosurgical procedures, are an especially rich source of insights intoxicate e. g. Damasio (1994). If patients with known damage to theatre of operations X perform a regretful-tempered task more poorly than radiation diagram patients, the difference is a clue that field of operation X is necessary to do that task.Often a single patient with a one-of-a-kind lesion changes the integral view in the field (much as a single crash day in the stock markets October 19, 1987changed academic views of financial market operations). For example, patient S. M. has bi sidelong corpus amygdaloideum damage. She can recognize all facial expressions except worry and she does not discern demos as untrus cardinalrthy the way others do. This is ruling evidence that the human corpus amygdaloideum is minute for judging who is agoraphobic and who to dis sureness. Virtual lesions can also be created by transcranial magnetic stimulation (TMS), which creates workings(prenominal) local folie to brain localitys development magnetic fields. III. stylize Facts about the Brain We now polish some basic accompaniments about the brain, emphasise those of special relate to economists. Figure 1 shows a sagittal slice of the human brain, with some areas that are mentioned below indicated. It has four lobesfrom front to back (left to right, clockwise in Figure 1), preliminary, parietal, occipital and temporal. The frontal lobe is thought to be the locus The editors of the Scandinavian diary of Economics 2004.Neuroeconomics wherefore economics likings brains ANTERIOR CINGULATE 559 PREFRONTAL CORTEX final result ACCUMBENS PUTAMEN AMYGDALA HIPPOCAMPUS CAUDATE Fig. 1. Human brain (frontal pole left) regions of potential interest to economists of planning, cognitive control and integration of cross-brain input. parietal areas govern motor action. The occipital lobe is where visual processing occurs. The temporal lobes are beta for memory, recognition and emotion. Neurons from different areas are interconnected, which enables the brain to respond to complex stimuli in an structured way.When an automated indem nity broker calls and says, fatiguet you want earthquake insurance? Press 1 for more nurture the occipital lobe pictures your house collapsing the temporal lobe feels a negative emotion and the frontal lobe engenders the worked up signal and weighs it against the in all probability cost of insurance. If the frontal lobe decides you should happen out more, the parietal lobe directs your fingers breadth to press 1 on your phone. A crucial fact is that the human brain is basically a mammalian brain with a bigheartedr mantle.This heart and soul human behavior leave generally be a compromise amid exceedingly evolved animal emotions and instincts, and more youngly evolved human deliberation and foresight see e. g. Loewenstein (1996). It also representation we can learn a lot about valet de chambre from canvas primates (who apportion more than 98% of our genes) and other animals. Three features of human brain function are notable automaticity, modularity and sense-making. agree to a prominent neuroscientist, Gazzaniga (1988) wrote The editors of the Scandinavian daybook of Economics 2004. 560 C. F. Camerer, G. Loewenstein and D. Prelec Human brain architecture is organized in scathe of functional facultys capable of working both deliberate in glove and independently. These modules can carry out their functions in parallel and outside of conscious experience. The modules can effect indwelling and external behaviors, and do this at regular intervals. Monitoring all this is a left-brain-based system called the interpreter. The interpreter considers all the outputs of the functional modules as soon as they are make and immediately constructs a hypothesis as to wherefore particular actions occurred. In fact the interpreter wishing not be privy to why a particular module responded.Nonetheless, it go away take the behavior at position value and fit the event into the ample ongoing mental schema (belief system) that it has already constructed. Many brain activities are automatic parallel, rapid processes which typically occur without awareness. Automaticity implies that pile i. e. , the deliberative cortex and the language processing which articulates a soulfulnesss reasons for their own behavior may genuinely not know the cause of their own behavior. 1 Automaticity content that overcoming some habits is only possible with cognitive effort, which is scarce.But the power of the brain to change also explains why tasks which are so challenging to brain and em system resources that they await impossibly difficult at outgrowthwindsurfing, tearaway(a) a car, geting charge to four screens at once in a trading roomcan be done automatically later on teeming practice. 2 At the same time, when good performance becomes automatic (in the form of procedural knowledge) it is typically unsaid to articulate, which means human capital of this sort is difficult to reproduce by program line others. The different brain modules a re very much neuroanatomically conk outd ( kindred organs of the em ashes).Some kinds of modularity are in truth remarkable The facial fusiform area (FFA) is narrow bug out for facial recognition somatosensory cortex has areas corresponding directly to different parts of the automobile trunk (body parts with more nerve endings, akin the mouth, down more corresponding brain tissue) features of visual images are neurally convertd in different brain areas, reproducing the external visual 1 For example, 40-millisecond flashes of angry or happy faces, followed immediately by a neutral mask face, set forth the amygdala even though mint are completely unaware of whether they saw a happy or angry face see Whalen, Rauch, Etcoff, McInerney, Lee and Jenike (1998). 2 Lo and Repin (2002) save psychophysiological measures (like skin conductance and heart rate) with actual contrasted exchange traders during their work. They ensnare that more experience traders showed lower emotio nal responses to market events that bewilder the hearts of less experient traders pounding. Their un finishing suggests that responding to market events becomes partially automated, which produces less biological reaction in experience traders. The editors of the Scandinavian diary of Economics 2004. Neuroeconomics why economics necessarily brains 561 rganization of the elements internally (retino study mapping) and at that place are separate language areas, Brocas and Wernickes areas,3 for semantics and for comprehension and grammar. Many neuroscientists recollect there is a specialized mentalizing (or theory of mind) module, which controls a persons inferences about what other plurality count, or feel, or power do see e. g. Fletcher, Happe, Frith, Baker, Dolan, Frackowiak and Frith (1995). Such a module presumably supports a whole range of exact human functionsdecoding emotions, cause of accessible rules, emotions, language, strategic concepts (bluffing)and has obvio us splendour for economic transactions.Modularity is important for neuroeconomics because it invites tests that map theoretical distinctions onto separate brain areas. For example, if bulk play grainys against other muckle differently than they make decisions (a game against reputation), as is presumed in economic theory, those two tasks should activate some different brain areas. However, the modularity hypothesis should not be taken too far. Most complex behaviors of interest to economics require collaborationism among more specialized modules and functions. So the brain is like a large companybranch offices specialize in different functions, besides also communicate to one other, and communicate more feverishly when an important decision is being do.Attention in neuroeconomics is thereof focused not just on specific regions, but also on decreeing circuits or collaborative systems of specialized regions which create filling and judgment. The brains unchewable drive to ward sense-making tops us to sieve to interpret our own behavior. The human brain is like a putter around brain with a cortical press secretaire who is glib at concocting explanations for behavior, and privileges deliberative explanations over cruder ones cf.Nisbett and Wilson (1977) and Wegner and Wheatley (1999). An important feature of this sense-making is that it is highly dependent on expectations in mental terms, it is top down as irrelevant to bottom-up.For example, when nation are abandoned incomplete pictures, their brains often automatically fill in the missing elements so that there is never any awareness that anything is missing. In other settings, the brains prevarication of order can make it point out patterns where there are none see Gilovich (1991). When subjects listen to music and watch news bulletin Christmas tree lights at the same time, they mistakenly report that the two are synchronized. foolish beliefs in sports streaks, as evidenced by Gilovich, Vallone and Tversky (1985), and seeing spurious patterns in time series like stock- toll data ( good analysis) may come from too much sense-making.Patients with Wernicke damage can burp sentences of words which make no sense strung together. Broca patients sentences make sense but they often cant find just the right word. The editors of the Scandinavian Journal of Economics 2004. 3 562 C. F. Camerer, G. Loewenstein and D. Prelec top-down encoding also implies the brain misses images it does not expect to see. A dramatic example is change-blindness. In an amusing study name Gorillas in our Midst, subjects watch a video of six people sledding a basketball and count the passes made by one team (indicated by jersey color). Forty seconds into the film clip, a gorilla walks into the center of the game, turns to the camera, thumps its chest, and then walks off.Although the gorilla cavorts onscreen for a full total of order seconds, about one-half of the subjects remain unmindful to t he intrusion, even when pointedly asked whether they had seen the gorilla manner of walking crossways the screen see Simons and Chabris (1999). When the brain does assimilate information, it does so rapidly and efficiently, overwriting what was antecedently believed. This can create a powerful hindsight bias in which events seem, by and by the fact, to take for been predictable even when they were not. Hindsight bias is credibly important in agency transaction when an agent takes an informed action and a principal second-guesses the agent if the action turns out elusively. This brings a special source of bump to the agents income and may clear to other behaviors like herding, diffusion of responsibility, inefficiencies from covering your ass, excessive labor turnover, and so on.We show these properties of the brain, which are rapid and often unuttered (subconscious), because they depart the most from conscious deliberation that may take place in complex economic decisions like saving for retirement and computing asset values. Our emphasis does not deny the importance of deliberation. The bearing of other mechanisms just means that the right models should include many components and how they interact. IV. Topics in Neuroeconomics Preferences Thinking about the brain suggests several(prenominal) shortcomings with the beat economic concept of preference. 1. Feelings of delight and inflictionfulness originate in homeostatic mechanisms that detect departures from a set-point or archetype level, and attempt to restore equilibrium. In some cases, these attempts do not require excess voluntary actions, e. g. when monitors for body temperature activate sw eat to cool you off and shivering to speedy you up. In other cases, the homeostatic processes bunk by changing momentary preferences, a process called alliesthesia see Cabanac (1979). When the core body temperature falls below the 98. 6F set-point, roughly anything that raises body temperature (su ch as placing ones hand in warm water) feels good, and the opposite is square when body temperature is too high. Similarly, monitors for blood swag levels, intestinal distention and many other variables trigger hunger. The editors of the Scandinavian Journal of Economics 2004. Neuroeconomics why economics needs brains 563Homeostasis means preferences are state-dependent in a special way the states are internal to the body and both affect preferences and act as information signals which provoke equilibration. Some kinds of homeostatic state-dependence are contagious across peoplefor example, the menstrual cycles of females living together tend to converge over time. Perhaps waves of misgiving and euphoria in markets work in a similar way, correlating responses so that internal states become macroeconomic states (as in the animal spirits, which, in Keyness view, were a cause of transmission line cycles). 2. Inferring preferences from a plectrum does not tell us everything we nee d to know. Consider the hypothetical case of two people, Al and Naucia, who both refuse to profane peanuts at a reasonable price cf. Romer (2000).The refusal to purchase reveals a communal dis avail for peanuts. But Al turned down the peanuts because he is allergic consuming peanuts causes a prickly rash, shortens his breath, and could even be fatal. Naucia turned down the peanuts because she ate a ample bag of peanuts at a funfair years ago, and subsequently got nauseous from eating too much candy at the same time. Since then, her gustatory system associates peanuts with illness and she refuses them at reasonable prices. era Al and Naucia both revealed an identical dis return, a neurally detailed account tells us more. Al has an nonresilient demand for peanutsyou cant pay him enough to eat them while Naucia would try a fistful for the right price. Their tastes lead also change over time differently Als allergy will not be recovered(p) by repeated consumption, while Naucia s distaste exponent be easy changed if she tried peanuts once and didnt get sick. Another example suggests how concepts of preference can be even wider of the mark by neglecting the temperament of biological state-dependence Nobody chooses to fall a cessation at the wheel while driving. Of course, an imaginative rational- election economistor a satiristcould posit a tradeoff amid sleep expediency and venture of plowing into a tree utility and infer that a dead sleeper goby must throw had higher u(sleep) than u(plowing into a tree).But this explanation is just tautology. It is more useful to think of the choice as resulting from the interaction of multiple systemsan automatic biological system which homeostatically shuts down the body when it is tired, and a controlled cognitive system which fights off sleep when closing your eyes can be fatal, and sometimes loses the fight. For economists, it is natural to model these phenomena by assuming that momentary preferences depend o n biological states. This raises a deep question of whether the cortex is aware about the nature of the processes and allocates cognitive effort (probably cingulate activity) to control them.For example, Loewenstein, ODonoghue and Rabin (in press) suggest that people neglect mean-reversion in biological states, which explains stylized The editors of the Scandinavian Journal of Economics 2004. 564 C. F. Camerer, G. Loewenstein and D. Prelec facts like suicide resulting from temporary depression, and shoppers get more food when they are hungry. 4 3. A third enigma with preferences is that there are different types of utilities which do not eternally coincide. Kahneman (1994) distinguishes four types remembered utility, judge utility, choice utility and experienced utility. Remembered utility is what people recall liking forbid utility is what they expect to like choice utility is what they reveal by choosing (classical revealed preference) and experienced utility is what they a ctually like when they consume.It is believably that the four types of utility are produced, to some extent, in separate brain regions. For example, Berridge and Robinson (1998) cede free-base distinct brain regions for missing and liking, which correspond roughly to choice utility and experienced utility. The fact that these areas are dissociated allows a wedge between those two kinds of utility. Similarly, a wedge between remembered and experienced utility can be created by features of human memory which are adaptational for general purposes (but maladaptive for remembering just now how something felt), such as repression of memories for severe torment in childbirth and other traumatic ordeals (e. g. , outdoor adventures led by author GL).If the different types of utility are produced by different regions, they will not always match up. Examples are easy to find. Infants reveal a choice utility by putting dirt in their mouths, but they dont rationally anticipate liking it. Addicts often report do do do do drugssss craving ( absent) which leads to consumption (choosing) that they say is not particularly pleasurable (experiencing). Compulsive shoppers buy goods (revealing choice utility) which they never use (no experienced utility). When decisions are rare, like getting pregnant, deciding whether to go to college, signing up for indemnity contributions, buying a house, or declaring war, there is no reason to think the four types of utility will necessarily match up.This possibility is important because it means that the standard analysis of welfare, which assumes that choices anticipate experiences, is incomplete. In repeated situations with clear feedback, human breeding may bring the four types of utilities together gradually. The rational choice model of undifferentiated and transparent preferences can then be characterized as a limiting case of a neural model with multiple utility types, under certain learning conditions. 4. A fourth proble m with preference is that people are assumed to value funds for what it can purchasethat is, the utility of income is indirect, and biological state-dependence also affects tipping.Most economic models suggest that the key variable affecting tipping behavior is how often a person returns to a restaurant. While this variable does influence tips slightly, a much upstandinger variable is how many alcoholic drinks the tipper lorry had see Conlin, Lynn and ODonoghue (2003). The editors of the Scandinavian Journal of Economics 2004. 4 Neuroeconomics why economics needs brains 565 should be derived from direct utilities for goods that will be purchased with cash. But roughly speaking, it issues that similar brain circuitry dopaminergic neurons in the midbrainis active for a wide variety of recognise experiencesdrugs, food, attractive faces, humorand silver pay backs. This means notes may be directly rewarding, and its deprivation horrendous.This ability explain why workaholics and the very monied keep working long hours after they should be retired or cutting back (i. e. , when the borderline utility of goods purchased with their marginal income is very low). Similarly, the immediate hurt of paying can make wealthy individuals reluctant to spend when they should, and predicts unconventional effect of pricinge. g. a preference for doctor payment plans kind of than marginal-use pricing see Prelec and Loewenstein (1998). 5. A common principle in economic modeling is that the utility of income depends only on the value of the goods and services it can buy, and is independent of the source of income.But Loewenstein and Issacharoff (1994) ground that merchandising prices for earned goods were larger when the allocated good was earned than when it was honorary. Zink, Pagnoni, Martin-Skurski, Chappelow and Berns (2004) also prepare that when subjects earned bills (by responding correctly to a stimulus), rather than just receiving equivalent rewards wit h no effort, there was greater activity in a midbrain reward region called the striatum. Earned money is literally more rewarding, in the brain, than unearned money. The fact that brain utility depends on the source of income is potentially important for welfare and tax policies. 6. Addiction is an important topic for economics because it seems to resist rational explanation.Becker and tater (1988) suggest that addiction and other changes in taste can be simulate by allowing real utility to depend on a stock of former consumption. They add the assumption that consumers understand the habit formation, which implies that behavior responds to judge future prices. 5 While variants of this model are a useful workhorse, other approaches are possible. It is relevant to rational models of addiction that every center of attention to which humans may become biologically addicted is also potentially addictive for rats. Addictive substances appear therefore to be hijacking primitive re ward circuitry in the old part of the human brain.Although this fact does not disprove the rational model (since 5 Evidence in favor of the rational-addiction view is that measured price elasticities for addictive goods like cigarettes are similar to those of other goods (roughly A0. 5 and A2), and there is some evidence that current consumption does respond to expected future prices cf. Gruber and Koszegi (2001) and Hung (2001). However, data limitations make it difficult to rule out warpnative explanations (e. g. , sensrs may be substituting into higher-nicotine cigarettes when prices go up). The editors of the Scandinavian Journal of Economics 2004. 566 C. F. Camerer, G. Loewenstein and D. Prelec ecently-evolved cortex may rescind rat-brain circuitry), it does show that rational intertemporal planning is not necessary to create the addictive phenomena of tolerance, craving and withdrawal. It also highlights the need for economic models of the primitive reward circuitry, which would prevail equally to man and rat. Another uncouth fact for rational-addiction models is that most addicts quit and slide by regularly. And while rational addicts should buy drugs in large quantities at discounted prices, and self-ration them out of inventory, addicts usually buy in weakened packages cf. Wertenbroch (1998). These facts suggest a struggle between a visceral desire or drugs and cortical awareness that drug use is a losing proposition in the long run relapse occurs when the visceral desire wins the struggle. It is also remarkable that repeated drug use conditions the user to expect drug administration after certain cues appear (e. g. , shooting up in a certain neighborhood or only smoking in the car). Laibson (2001) created a pioneering bollock model of cue-dependent use, showing that there are multiple equilibria in which cues either trigger use or are ignored. The more elaborate model of Bernheim and Rangel (in press), is a paradigmatic example of how econom ic theory can be deeply rooted in neuroscientific details. They assume that when a person is in a hot state they use drugs in a cold state, whether they use is a rational choice.A variable S, from 0 to N, summarizes the persons history of drug use. When he uses, S goes up when he abstains S goes down. They characterize destructively addictive drugs and prove that the value function is declining in the drug-use history variable S. By assuming the cold state reflects the persons true welfare, they can also do welfare analysis and compare the ability effects of policies like laissezfaire, drug bans, sin taxes and regulated dispensation. Decision-making under Risk and misgiving Perhaps the most rapid progress in neuroeconomics will be made in the study of unassured decision-making. We focus on three topics risk judgments, godforsaken choice and probability.Risk and ambiguity In most economic analyses risk is equated with variation of outcomes. But for most people, risk has more dime nsions (particularly emotional ones). Studies suck in long shown that potential outcomes which are catastrophic and difficult to control are perceived as more sorry (controlling for statistical likelihood) see Peters and Slovic (2000). Business executives say risk is the chance of loss, especially a large loss, often approximated by semi variableness (the variance of the loss portion of an outcome distribution) see Luce and weber (1986), MacCrimmon and Wehrung (1986) and recent interest in value-at-risk measures in finance. The editors of the Scandinavian Journal of Economics 2004.Neuroeconomics why economics needs brains 567 Fig. 2. possible action the brain at the Sylvian fissure (between temporal and frontal lobes) shows the insula cortex (frontal pole is on the right). Illustration courtesy of Ralph Adolphs These properties are exemplified by the reverefulness of flying (which is statistically much safer than driving) phobias and public outcry to dangers which are horrifyi ng, but rare (like kidnappings of children and terrorist bombings). Since economic transactions are inherently interpersonal, emotions which are emotional by genial risks, like shame and business organization of public speaking could also influence economic activity in elicit ways.A lot is known about the neural processes underlying affective responses to risks see Loewenstein, Hsee, Welch and Weber (2001). Much aversion to risks is driven by immediate fear responses, which are generally traceable to a midget area of the brain called the amygdala cf. LeDoux (1996). The amygdala is an internal hypochondriac which provides quick and annoying emotional signals in response to potential fears. But the amygdala also receives cortical inputs which can moderate or override its responses. 6 An interesting experiment illustrating cortical override begins with fearconditioningrepeatedly administering a caliber cue followed by a painful electric cuff.Once the in pace becomes associat ed in the animals mind with the reversal, the animal shows signs of fear after the tone is played, but before 6 For example, people exhibit fear reactions to films of torture, but are less afraid when they are told the people portrayed are actors and asked to judge some unemotional properties of the films. The editors of the Scandinavian Journal of Economics 2004. 568 C. F. Camerer, G. Loewenstein and D. Prelec the shock arrives (the tone is called a conditioned stimulus a la Pavlovs famous salivating dogs). When the tone is played repeatedly but not followed by a shock, the animals fear response is gradually extinguish. At this point, a Bayesian might conclude that the animal has simply born(p) the connection between the tone and the shock (the posterior probability P(shockjtone) has fallen).But the neural candor is more nuanced than that. If the shock is then readministered following the tone, after a long expiration of extinction, the animal immediately relearns the tonesho ck relation and feels fear very rapidly. 7 Furthermore, if the connections between the cortex and the amygdala are severed, the animals original fear response to the tone immediately reappears. This means the fear response to the tone has not disappeared in the amygdala, it is simply being curb by the cortex. Another dimension of idle choice is ambiguitymissing information about probabilities people would like to know but dont (e. g. , the Ellsberg paradox).Using fMRI, Hsu and Camerer (2004) found that the insula cortex was differentially activated when people chose certain money amounts rather than dubious jeopardizes. The insula (shown in Figure 2) is a region that processes information from the nervous system about bodily statessuch as physical pain, hunger, the pain of complaisant exclusion, disgusting odors and choking. This provisionary evidence suggests a neural primer coat for pessimism or fear of the unknown influencing choices. unsteady choice Like risk judgments, choices among risky finds involve an interplay of cognitive and affective processes. A well-known study reported in Bechara, Damasio, Tranel and Damasio (1997) illustrates such collaboration.Patients suffering prefrontal damage (which, as discussed above, produces a disconnect between cognitive and affective systems) and rule subjects chose tease from one of four decks. Two decks had more cards with extremum wins and losses (and negative expected value) two decks had less extreme outcomes but positive expected value (EV), and subjects had to learn these deck compositions by trial-and-error. They compared behavior of normal subjects with patients who had damage to prefrontal cortex (perfluorocarbon which limits the ability to receive emotional material markers and creates indecision). Both groups exhibited similar skin conductance reactions (an interpretation of fear) immediately after large-loss cards were encountered. 7 This is with child(p) to reconcile with a standard Bayesian analysis because the ame likelihood evidence (i. e. , frequency of shock following a tone) which takes many trials to condition fear in the startle part of the experiment raises the posterior rapidly in just one or two trials in the later part of the experiment. If the animal had a low prior belief that tones might be followed by shocks, this could explain slow update in the first part. But since the animals revealed posterior belief after the extinction is also low, there is no simple way to explain why updating is so rapid after the fear is reinstalled. The editors of the Scandinavian Journal of Economics 2004. Neuroeconomics why economics needs brains 569However, normal subjects learned to avoid those risky bad decks but the prefrontal-damage patients rapidly returned to the bad decks concisely after suffering a loss. In fact, even among normal subjects, those who were lowest in emotional reactivity acted more like the prefrontal patients see Peters and Slovic (2000). Homeostasis in the body implies that people will adapt to changes and, consequently, are more sensitive to changes than to absolute levels. Kahneman and Tversky (1979) suggest the same principle applies to gains and losses of money from a point of reference and, furthermore, that the pain of loss is stronger than the entertainment of equal-sized gains.Imaging studies show that gains and losses are fundamentally different because losses produce more overall activation and slower response times, and there are differences in which areas are active during gain and loss see Camerer, Johnson, Rymon and Sen (1993) and metalactor and Dickhaut (2002). Dickhaut, McCabe, Nagode, Rustichini and Pardo (2003) found more activity in the orbitofrontal cortex when cerebration about gains compared to losses, and more activity in wanting(p) parietal and cerebellar areas when persuasion about losses. ODoherty, Kringelbach, Rolls, Jornak and Andrews (2001) found that losses differentially activated lateral OFC and gains activated medial OFC. Knutson, Westdorp, Kaiser and Hommer (2000) found strong activation in mesial PFC on both gain and loss trials, and additional activation in earlier cingulate and thalamus during loss trials.Single-neuron measurement by Schultz and colleagues, as reported in Schultz and Dickinson (2000), and Glimcher (2002) in monkeys has disjointed specific neurons which correspond remarkably most to familiar economic ideas of utility and belief. Schulz isolates dopaminergic neurons in the ventral tegmental midbrain and Glimcher studies the lateral inferior parietal (LIP) area. The midbrain neurons fire at rates which are monotonic in reward amount and probability (i. e. , they encode reward and probability). The LIP neurons seem to encode expected value in games with mixed-strategy equilibria that monkeys play against computerized opponents. An interesting fact for neuroeconomics is that all the violations of standard utility theories exhibited in hum an choice experiments over money have been replicated with animals.For example, in Allais paradox choices people appear to heavy(a) low probabilities, give a quantum come out in weight to certain outcomes, and do not distinguish sharply enough between modal(a) probabilities see e. g. Prelec (1998). Rats show this pattern too, and also show other expected utility violations see e. g. Battalio, Kagel and super C (1995). People also exhibit context-dependence whether A is chosen more often than B can depend on the presence of an irrelevant third choice C (which is dominated and never chosen). Context-dependence means people compare choices within a set rather than assigning separate numeric utilities. Honeybees exhibit the same pattern see Shafir, Waite and Smith (2002). The striking The editors of the Scandinavian Journal of Economics 2004. 570 C. F. Camerer, G. Loewenstein and D. Prelec arallelism of choices across species suggests that the human neural circuitry for these decis ions is old, and perhaps specially adapted to the challenges all species faceforaging, reproduction and choicebut not necessarily consistent with rationality axioms. Gambling Economics has never provided a satisfactory theory of why people both insure and gamble. Including emotions and other neuroscientific constructs might help. Like drug addiction, the study of pathological gambling is a useful test case where simple theories of rationality take us only so far. About 1% of the people who gamble are pathologicalthey report losing control, chasing losses, and harming their personal and work relationships cf. subject area Research Council (1999).Pathological gamblers are overwhelmingly male. They drink, smoke and use drugs much more oftentimes than average. Many have a dearie game or sport they gamble on. Gambling incidence is correlated among twins, and contractable evidence shows that pathologicals are more likely to have a certain gene allele (D2Al), which means that large r thrills are needed to get modest jolts of pleasure see Comings (1998). One study shows that intercession with naltrexone, a drug that blocks the operation of opiate receptors in the brain, reduces the urge to gamble see e. g. Moreyra, Aibanez, Saiz-Ruiz, Nissenson and Blanco (2000). 8 Game Theory and Social PreferencesIn strategic interactions (games), cunning how another person thinks is critical to predicting that persons behavior. Many neuroscientists believe there is a specialized mind-reading (or theory of mind) area which controls reasoning about what others believe and might do. Social preferences McCabe, Houser, Ryan, Smith and Trouard (2001) used fMRI to measure brain activity when subjects played games involving trust, cooperation and punishment. They found that pretenders who cooperated more often with others showed profitd activation in Broadmann area 10 (thought to be one part of the mind-reading circuitry) and in the thalamus (part of the emotional limbic system) .Their finding is nicely corroborated by hammock and Sally (2002), who compared normal and autistic subjects acting ultimatum games, in which a proposer offers a take-it-or-leave-it division of a sum of money to a responder. Autists often have bring out figuring out what other people think and believe, and are thought to have deficits in area 10. About a quarter of their autistic adults offered nothing in the ultimatum game, which is consistent with an inability to imagine why others would regard an offer of zero as unfair and reject it. The same drug has been used to successfully treat driven shopping see McElroy, Satlin, Pope, Keck and Hudson (1991). The editors of theScandinavian Journal of Economics 2004. 8 Neuroeconomics why economics needs brains 571 One of the most telling neuroscientific findings comes from Sanfey, Rilling, Aaronson, Nystrom, Leigh and Cohens (2003) fMRI study of ultimatum bargaining. By imaging the brains of subjects responding to offers, they found th at very unfair offers ($1 or $2 out of $10) differentially activated prefrontal cortex (PFC), anterior cingulate (ACC) and insula cortex. The insula cortex is known to be activated during the experience of negative emotions like pain and disgust. ACC is an executive function area which often receives inputs from many areas and resolves conflicts among them. After an unfair offer, the brain (ACC) struggles to resolve the conflict between wanting money (PFC) and disliking the disgust of being do by unfairly (insula). Whether participants reject unfair offers or not can be predicted rather reliably (a correlation of 0. 45) by the level of their insula activity. It is natural to speculate that the insula is a neural locus of the distaste for inequality or unfair treatment posited by recent models of social utility, which have been successfully used to explain robust ultimatum rejections, public goods contributions, and trust and gift-exchange results in experiments see Fehr and Gachte r (2000) and Camerer (2003, Ch. 2). 10 ?In a similar vein, de Quervain, Fischbacher, Treyer, Schellhammer, Schynyder, Buck and Fehr (2004) used PET imaging to explore the nature of costly third-party punishment by players A, after B played a trust game with player C and C decided how much to revert. When C repaid too little, the players A often punished C at a cost to themselves. They found that when players A inflicted an economic punishment, a reward region in the striatum (the pith accumbens) was activatedrevenge tastes sweet. When punishment was costly, regions in prefrontal cortex and orbitofrontal cortex were differentially active, which indicates that players are responding to the cost of punishment. Zak, Matzner and Kurzban 2003) explored the role of ductless glands in trust games. In a canonical trust game, one player can invest up to $10 which is tripled. A second trustee player can keep or repay as much of the tripled investment as they want. Zak et al. measured eight hormones at different points in the trust game. They find an addition in oxytocina hormone 9 The ACC also contains spindle cellslarge neurons shaped like spindles, which are almost unique to human brains see Allman, Hakeem, Erwin, Nimchinsky and Hof (2001). These cells are probably important for the activities which distinguish humans from our primate cousins, such as language, cognitive control and complex decision-making. 0 The fact that the insula is activated when unfair/offers are spurned shows how neuroeconomics can deliver fresh predictions it predicts that low offers are less likely to be rejected by patients with insula damage, and more likely to be rejected if the insula is stimulated indirectly (e. g. , by exposure to disgusting odors). We dont know if these predictions are true, but no current model would have made them. The editors of the Scandinavian Journal of Economics 2004. 572 C. F. Camerer, G. Loewenstein and D. Prelec which rises during social bonding (such as breast-feeding)in the trustee if the first player trusts her by investing a lot.Interesting evidence of social preferences comes from studies with monkeys. Brosnan and de Waal (2003) find that monkeys will reject small rewards (cucumbers) when they see other animals getting better rewards (grapes, which they like more). Hauser, Chen, Chen and Chuang (2003) also find that tamarins act altruistically toward other tamarins who have benefited them in the past. These studies imply that we may share many properties of social preference with monkey cousins. Iterated thinking Another area of game theory where neuroscience should prove useful is iterated strategic thinking. A central concept in game theory is that players think about what others will do, and about what thers think they will do, and this reasoning (or some other process, like learning, evolution or imitation) results in a mutually consistent equilibrium in which each player guesses correctly what others will do (and chooses their own best response given over those beliefs). From a neural view, iterated thinking consumes scarce working memory and also requires one player to put herself in another players mind. There may be no generic human capacity to do this beyond a couple of steps. Studies of experimental choices, and issuance information subjects look up on a computer screen, suggest 12 steps of reasoning are typical in most populations cf. e. g.Costa-Gomes, Crawford and Broseta (2001), Johnson, Camerer, Sen and Tymon (2002), and see Camerer, Ho and Chong (2004). 11 Bhatt and Camerer (2004) find differential activation in the insula in players who are poor strategic thinkers, which they interpret as reflecting self-focus that harms strategizing. V. Conclusions Economics separate company from psychology in the early twentieth century after economists became doubting that basic psychological forces could be measured without inferring them from behavior (and then, circularly, using those inferred fo rces to predict behavior). Neuroscience makes this measurement possible for the first time. It gives a new way to open the black box which is the building block of economic systemsthe human mind.More ambitiously, students are often bewildered that the models of human nature offered in different social sciences are so different, and often contradictory. Economists punctuate rationality psychologists 11 It is important to note, however, that principles like backward induction and computation of equilibrium can be easily taught in these experiments. That means these principles are not computationally difficult, per se, they are simply unnatural. In terms of neural economizing, this means these principles should be treated like efficient tools which the brain is not readilyequipped with, but which have low marginal costs once they are acquired. The editors of the Scandinavian Journal of Economics 2004. Neuroeconomics why economics needs brains 73 emphasize cognitive limits and sensiti vity of choices to contexts anthropologists emphasize acculturation and sociologists emphasize norms and social constraint. An identical question on a final exam in each of the fields about trust, for example, would have different correct answers in each of the fields. It is possible that a biological foothold for behavior in neuroscience, perhaps have with all-purpose tools like learning models or game theory, could provide some coalition across the social sciences cf. Gintis (2003). Most economists we talk to are curious about neuroscience but skeptical of whether we need it to do economics.The tradition of ignoring the inside of the black box is so deeply ingrained that learning about the brain seems like a luxury we can live without. But it is inevitable that neuroscience will have some impact on economics, eventually. If nothing else, brain fMRI imaging will alter what psychologists believe, leading to a ripple effect which will eventually inform economic theories that are i ncreasingly responsive to psychological evidence. Furthermore, since some neuroscientists are already thinking about economics, a field called neuroeconomics will arise whether we like it or not. So it makes sense to initiate a conversation with the neuroscientists right away. Economics could continue to chug along, paying no attention to cognitive neuroscience.But, to ignore a major new stream of relevant data is always a dangerous strategy scientifically. It is not as if economic theory has given us the final word on, e. g. , advertise effectiveness, dysfunctional consumption (alcoholism, teenage pregnancy, crime), and business cycle and stock market fluctuations. It is hard to believe that a growing familiarity with brain functioning will not lead to better theories for these and other economic domains, perhaps surprisingly soon. In what way might neuroscience contribute to economics? First, in the applied domain, neuroscience measurements have a comparative advantage when oth er sources of data are perfidious or biased, as is often the case with surveys and self-reports.Since neuroscientists are asking the brain, not the person, it is possible that direct measurements will yield more reliable indices of some variables which are important to economics (e. g. , consumer confidence, and perhaps even welfare). Second, basic neuroeconomics research will ideally be able to link hypotheses about specific brain mechanisms (location, and activation) with unobservable intermediate variables (utilities, beliefs, planning ahead), and with observable behavior (such as choices). One class of fruitful tasks is those where some theories assume choice A and choice B are made by a common mechanism, but a closer neural look might suggest otherwise.For example, a standard assumption in utility theory is that marginal rates of substitution exist across very different bundles of goods (and, as a corollary, that all goods can be priced in money terms). But some tradeoffs are simply The editors of the Scandinavian Journal of Economics 2004. 574 C. F. Camerer, G. Loewenstein and D. Prelec too difficult or morally repulsive (e. g. , selling a body part). Elicited preferences often vary substantially with descriptions and procedures e. g. Ariely, Loewenstein and Prelec (2003). Neuroscience might tell us precisely what a difficult choice or a sacred preference is, and why descriptions and procedures matter. 12 A third military issue from neuroscience is to suggest that economic choices which are considered different in theory are using similar brain circuitry.For example, studies cited above found that insula cortex is active when players in ultimatum games receive low offers, when people choose ambiguous gambles or money, when people see faces of others who have cooperated with them, and in players who are poor strategic thinkers. This suggests a possible link between these types of games and choices which would never have been suggested by current theo ry. A fourth potential payoff from neuroscience is to add precision to functions and parameters in standard economic models. For instance, which substances are cross-addictive is an empirical question which can guide theorizing about dynamic substitution and complementarity. A priming dose of cocaine enhances craving for heroin, for example cf. Gardner and Lowinson (1991).Work on brain structure could add details to theories of human capital and labor market discrimination. 13 The point is that knowing which neural mechanisms are involved tell us something about the nature of the behavior. For example, if the oxytocin hormone is released when you are believe, and being trusted sparks reciprocation, then raising oxytocin exogeneously could increase trustworthy behavior (if the brain doesnt adjust for the exogeneity and undo its effect). In another example, Lerner, Small and Loewenstein (in press) show that changing moods exogeneously changes buying and selling prices for goods. The basic point is that understanding the effects of biological and emotional processes like hormone 2 Grether, Plott, Rowe, Sereno and Allman (2004) study a related problemwhat happens in second-price Vickrey auctions when people learn to bid their valuations (a dominant strategy). They find that the anterior cingulate is more active before people learn to bid their values, which is a neural way of saying that program line valuations is not transparent. 13 It has been known for some time that brains rapidly and unconsciously (implicitly) associate same-race names with good words (Chip-sunshine for a white person) and opposite-race names with bad words (Malik-evil) see e. g. McConnell and Leibold (2001). This fact provides a neural source discrimination which is uncomplete a taste nor a judgment of skill based on race (as economic models usually assume).Opposite-race faces also activate the amygdala, an area which processes fear cf. Phelps, OConnor, Cunningham, Funayama, Gatenby, Gor e and Banaji (2000). Importantly, implicit racial associations can be disabled by first showing people pictures of faces of familiar other-race members (e. g. , showing Caucasians a picture of actor Denzel Washington). This shows that the implicit racial association is not a taste in the conventional economic sense (e. g. it may not respond to prices). It is a cognitive impulse which interacts with other aspects of cognition. The editors of the Scandinavian Journal of Economics 2004. Neuroeconomics why economics needs brains 575 elease and moods will lead to new types of predictions about how variations in these processes affect economic behavior. In the empirical contracts literary productions there is, surprisingly, no adverse selection and moral endanger in the market for automobile insurance cf. Chiappori, Abbring, Heckman and Pinquet (2001). But there is plenty of moral hazard in healthcare use and worker behavior. A neural explanation is that driving performance is both opt imistic (everyone thinks they are an above-average driver, so poor drivers do not purchase fuller coverage) and automatic (and is therefore unaffected by whether drivers are insured) but healthcare purchases and labor effort are deliberative.This suggests that degree of automaticity is a variable that can be usefully included in contracting models. Will it ever be possible to create formal models of how these brain features interact? The answer is definitely Yes, because models already exist cf. e. g. Benhabib and Bisin (2004), Loewenstein and ODonoghue (2004) and Bernheim and Rangel (in press). A key step is to think of behavior as resulting from the interaction of a small number of neural systemssuch as automatic and controlled processes, or hot affect and cold cognition, or a module that chooses and a modu