Wednesday, August 04, 2004

Neuroeconomics -- the next big new thing

Wondering what "neuroeconomics" is but afraid to ask? With the word floating around various posts, links and abstracts, it's getting a bit like nano-anything. Though a lot less ubiquitous.

Here finally is a great thumbnail -- not toooo cryptic, but not chapter-length. Courtesy Kevin McCabe at George Mason University who posts (infrequently) to his cleverly-named Neuroeconomics blog.

Neuroeconomics is an interdisciplinary research program with the goal of building a biological model of decision making in economic environments. Neuroeconomists ask, how does the embodied brain enable the mind (or groups of minds) to make economic decisions? By combining techniques from cognitive neuroscience and experimental economics we can now watch neural activity in real time, observe how this activity depends on the economic environment, and test hypotheses about how the emergent mind makes economic decisions. Neuroeconomics allows us to better understand both the wide range of heterogeneity in human behavior, and the role of institutions as ordered extensions of our minds.

Now that wasn't too painful was it?

All joking aside, the neural cognition metaphor is a potential breakthrough for social sciences more generally and economics especially. The vocabulary and metaphors we use are the basis of all explanatory narratives, from classical history to quantitative financial economics, regardless of whether our hypotheses are testable through experimental techniques. In turn, those narratives form the background against which we make decisions, from the most personal ways we choose to live our lives to the most public decisions of war and peace.

Microeconomics has had grave difficulty overcoming the limits of its "rational economic man" model. Over the decades it has come to require more and more elaboration of varieties of preferences (and therefore less and less explanatory value) to accommodate heterogeneity of behaviors in response to economic rules (universal forces?) such as supply and demand.

Choice theory and its focus on "incentives" has provided enormous insight into the psychological dynamics of "rational economic men" interacting, and its application to social fields such as law has produced some of the best stuff in the past two decades. But the "social" dimension remains simply an outcome of individuals interacting and, at its foundation, we are left with an even more atomized set of actors.

Introducing the social dimension by shifting the focus of analysis from the individual to the institution or the firm has typically presented the same problems as those that focus on the individual actor, merely changing the level of analysis but still treating each institution as a behavioral unit, a sort of "rational economic man," without capturing much about the social aspect of behavior at either level.

Attempts to capture the "social" dimension by using biological metaphors, such as "organic systems," have several advantages. They are neither heirarchical nor linear/sequential but rather stress many cross-linking interdependencies and, over time, feedback loops. The organism metaphor, however, seems to over-determine equilibrium and treat disequilibriating conditions or behavior as somehow deviant, diseased or dysfunctional. Using an organism as a metaphor doesn't handle the psychological insights of "choice" theories. The organic system approach also doesn't have a particularly good way of capturing change, other than with a life-cycle metaphor.

The metaphor of neural networks and cognitive process offer a way to combine the advantages of both "choice" and "organism." It also adds an important way of incorporating change that comes from reacting to an external environment and from the learning process, both at the individual and institutional level. Furthermore, within the metaphor itself, the importance of shared explanatory narratives and the process by which those narratives change, a sort of institutional economics of ideas, can be explictly addressed. All in all, an enormously intriguing start of something far more important than a research agenda.

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