Neuroeconomics

Over 300 years, social scientists and natural scientists have tried to understand how individuals make decisions based on various strategies. In the 1990s a group of interdisciplinary scholars begun to study natural scientific approaches to study the choice Factor in an emerging synthetic discipline now known as Neuroeconomics.

What is Neuroeconomics?

Neuroeconomics is a discipline that combines the theoretical and empirical tools from neuroscience, psychology and Economics into a single approach. This was done to gain a better understanding of economic decision-making skills. Advances in technology have helped neuroscience produce better methods for the analysis of brain activity.

Neuroeconomics helps in filling the gap between conventional economic theories. The economic decision-making based on the theory of rational choice will suggest that investors evaluate risks objectively and react in a rational manner. However, this does not deal with that is going on in the individual’s mind. Behavioural Economics helped to breach this obstacle by the application of psychology.

Neuroeconomics takes this step to another level where it studies the relationships between economic decisions and observable phenomena in animal or human brains. This helps get the insights into the mechanisms responsible for driving individuals to better predict the future of economics.

Neuroeconomics is related to the field of experimental economics. Observational studies are conducted where human subjects are offered one or more sets of choices. The researchers observe, measure and record the physiological and biochemical elements from before and after the choice is made by the subject.

Neuroeconomics researchers use tools like magnetic resonance imaging (MRI), Positron Emission Tomography (PET) to observe the blood flow in various areas of the brain. Blood and saliva tests are also done to measure neurotransmitter and hormone levels.

Central Areas of Study in Neuroeconomics

Neuroeconomics is broken down into three central areas of study. They are listed below:

1. Intertemporal Choice

This process is when an individual decides what and how much to do at different points in time. Individuals value goods in a different manner at different points and the choices one makes influences the choices available to others. The neuroeconomic study in this area seeks to understand the brain activity, time preference and impulsivity.

For example, when the lockdown due to Coronavirus was declared in India, people went panic buying. People were now stocking up on sanitizers and disinfectants more than anything else. The hoarding of these items led to the unavailability of the same for others.

2. Social decision-making

The social decision-making study relates to Game theory. Game theory involves mathematical models of conflict and cooperation between rational, intelligent decision-makers. Social decision-making involves multiple, interacting subjects where the brain and neural activity is studied.

3. Decision making under risk

This is a process where an individual faces a choice among alternatives with fixed outcomes. However, it varies according to probability distributions that the decision-makers may or may not be aware of. The study focuses on risk reference, aversion to risk and loss or incomplete information about decisions are reflected in the brain and nervous system.