Neuroeconomics and the New Science of Behavior

Wouldn’t it be great if you could understand the stock market precisely; or, if you could know precisely how to sell things to differing kinds of individuals; or, if you could predict how the leaders of a large company where you are employed were likely to react to new market conditions?  We are moving in those directions.

For hundreds of years (at least since Descartes) behavior has been considered to derive partly from the brain and partly from “the mind”.  By cleaving one foundation of behavior away from the physical brain we’ve allowed ourselves to imagine much more human behavioral freedom than we actually have.  Not only do we like the idea, it has also served to give us some way to grapple with foundations of behavior which have been heretofore far to difficult to understand given our limited insight into brain function.  For example, we’ve imagined ourselves to have free choice – the ability to make choices unencumbered by anything.  We’ve also imagined ourselves (at least some of ourselves) to be capable of completely rational thought – analysis unencumbered by behavioral limitations such as emotions.  But all of that just isn’t true, as science is now demonstrating.

The era of the Cartesian Duality (the segregation of mind and brain) is going away.  It has been with us since the mid 1600’s.  In general, we like the idea of a mind.  Many people react negatively to the idea that maybe the mind is just one aspect of the brain.  So, the denouement of the mind-brain segregation will take time, maybe another hundred years.  Nonetheless, we can see where the trend is going.

Drawn by the allure of information or economic opportunity (or both) many scientists are now looking in detail at the brain foundations of human economic behavior.  A whole new discipline has developed: neuroeconomics.  This discipline is looking carefully at how we make choices – right down to the level of individual brain neurons.

The brain consists of something on the order of 100 billion neurons (and other hundreds of billions of “supporting cells”).  The neurons become active in particular situations and by that activity they carry information to other neurons.  When you process that through the trillions of connections of the hundred billion neurons you end up with a capability of some amazingly complex tasks (just as hundreds of billions of one’s or zero’s in computer memory lead to our fabulous wealth of computer capabilities).

As neuroeconomic scientists look for explanations of behavior, down even to the level of single neurons, new insights derive.  There is a wide and evolving body of material available on this subject.  Below are three links to perspectives some of you might find useful.  I’d suggest you finish reading this post before you go to them because they are long and you might not find your way back to read here the “punch line”.  If you have no familiarity with brain structures the topics may be too complex (particularly that of Paul Glimcher) but you can at least “take away” the perspective that the old ways of looking at brain function are being replaced.

The following link will lead you to a discussion by Dan Pink, an attorney, who looks at the new science of motivation:

This next link will lead you a discussion by Dan Ariely regarding how we make decisions:

This third link will take you to a highly esoteric discussion by a major contributor to the neuroeconomics discipline, Paul Glimcher.  In this he discussed detailed data from monkey brain cells which reveal how choices are made.  It’s all very complicated, but even if you have no familiarity with the brain the talk can give you some insight into the perspective that “the mind” is truly being explained by the brain.  Here’s the link:

So, what will you learn if you have a look at these videos (or some of the many others out there which deal with the new brain science of behavior)?  What you will begin to appreciate is that the idea evolution would prepare us to be abstractly rational beings is actually rather silly when you think about it.  Through the journey of evolution living creatures have needed to adapt to specific circumstances – and to do so quickly.  Emotions were created as a technique for providing a rapidly accessible summary of what has been learned from past experience with particular situations.  And, it is emotions – rather than rigorous abstraction – which largely guide most choice.  Further, since nothing in the 4.5 billion years of life’s evolution on the planet has necessitated living beings to utilize a rigorously scientific approach to response, we are a bit naive to even presume that we are biologically prepared for rigorously scientific analysis.  Science has been “born” with us.  It didn’t exist before as an actual guiding principle.

So, in this era when we want to understand human response patterns we often need to use a study paradigm called a “double-blind, placebo controlled trial”.  What this means in practical terms is that the study has to be set up to prevent both the people doing the test and the test subjects from biased – emotionally based – answers; and, when we are looking for the effect of something we need to include a placebo comparison because of the tendency for humans to be subject to “the placebo effect” (the consequence of knowing something is being done).  In total, scientific studies of human behavior need to take our natural tendency toward bias out of the picture.  (Certainly not all people are biased by emotions and not all people are biased all the time, but it is a problem.)

To close the circle we now return to the stock market.  It is extremely well recognized that the buying and selling of stocks, just like the buying and selling of products, is an emotional process.  While there may be tools of rigorous science available to help the data analysis, people who study “the market” recognize that at the end of the day emotion is a critical issue.  So, if the specific functions of emotions can be understood scientifically then a Holy Grail of the stock market – predicting “waves” due to emotion – might become possible.  Similarly, we will learn how to better identify the signals which control other purchases, as well as the signals which may make the corporate CEO lead one way or another in the face of new business challenges.  As they say, these are “where the money is”.

1 thought on “Neuroeconomics and the New Science of Behavior

  1. John, neuroeconomics is something that is long overdue from my perspective – something that is especially relevant given we as a global society failed to learn lessons from the financial crisis of 2008.
    What is it that makes us behave in the way we do, to make certain choices and take such big financial risks under certain circumstances.
    Modern civilisation has come to rest on the foundations of a democracy backed up by capitalism (a constant need to grow to generate profit) – it is more powerful than religion or science back in the days of Descartes and yet we have neglected to study this area. Perhaps if John Locke were alive today his work would have such a focus!
    Really interesting stuff, John. Thanks for a great post.

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