May 2005

The Economics of Brains

Continued from page 1

By Gregory T. Huang

Decisions, Decisions
It's an intriguing idea: to rethink economic theory from the ground up, taking into account the workings of the human brain. For now, though, neuroeconomics is far removed from the day-to-day concerns of most financiers or CEOs.

The first thing to remember is that the field is very, very young. Neurological tools are still relatively crude. Brain-imaging techniques such as fMRI and positron emission tomography (PET) measure changes in blood flow and hence reveal the collective activity of thousands of neurons over a period of seconds. An electroencephalogram (EEG) uses electrodes on the scalp to measure the brain's electrical activity on the millisecond time scale, but its spatial resolution is so poor that its use is limited. What's more, imaging studies point out only correlations between brain activity and behavior. One must be careful in drawing neuro­scientific conclusions and making economic predictions.

Because their field is so young, and because they are pursuing different goals, economists and neuroscientists working in neuroeconomics sometimes seem to be talking about different things. For instance, Camerer and his colleagues write that "The foundations of economic theory were constructed assuming that details about the functioning of the brain's black box would not be known....[But now] the study of the brain and nervous system is beginning to ­allow direct measurement of thoughts and feelings." Most neuroscientists would disagree with the second point. Direct mea­surement of how groups of neurons interact and which brain areas are active during which physical and mental tasks, yes. But thoughts and feelings are subjective (see "The Unobservable Mind," February 2005) and observable only by interpreting data.

In a similar vein, neuroscientists and psychologists have at times equated economic utility -- the subjective value of a good or service -- with the notions of reward and pleasure. These ideas may be related, but they are certainly not interchangeable. Nevertheless, early mutual confusion about both fields' technical terms and bodies of knowledge is being resolved. "We are rapidly approaching a common language," says Gregory Berns, a neuroscientist at Emory University.

A more fundamental issue for neuroeconomics is this: should economists care? Perhaps understanding how the brain works is more trouble than it's worth. After all, some recent findings are not at first glance very economically enlightening. Anyone who has regretted an impulse purchase, for instance, would be unsurprised to learn that evaluations of immediate and delayed rewards use different parts of the brain. For now, neuroeconomics is subject to the criticisms that plague psychology: that its experiments show what is already intuitively obvious, and its models are descriptive, not quantitative. But Stanford psychologist Brian Knutson and psychiatrist Richard Peterson are trying to answer that criticism. Their paper in a forthcoming issue of Games and Economic Behavior reports that subjects seem to use different parts of their brains when they consider financial gains and when they consider financial losses; more recently, they have found that subjects use different parts again to evaluate the magnitude and probability of those gains and losses. Knutson and Peterson's work is part of an increasing effort to figure out how economic utility may be coded quantitatively in various regions of the brain. If economists could track the different components of utility in a statistical way, they could understand why some people take risks and some don't -- and possibly predict their future behavior.