May 2005

The Economics of Brains

Continued from page 2

By Gregory T. Huang

Protect Us from Ourselves
Suppose that the science and technology of neuroeconomics progress according to plan. (They won't, of course, but let's set that aside for now.) At some point in the future, our brains' inner workings, our innermost thoughts, all of our decision-making processes, could be deciphered and displayed individually and unambiguously, like the hands of poker players in televised tournaments. What would we do with this information? How would we protect ourselves? Entire industries -- finance, health care, advertising -- stand to flourish or die based on the answers.

Let's consider some early indications of what the social consequences of neuroeconomics could be. In finance, an initial attempt at using brain studies to model markets was put forth in a recent paper by the economist Andrew Lo. Lo, the director of MIT's Laboratory for Financial Engineering, argues that the standard theory of "efficient markets" -- which assumes investors have perfect information and behave rationally -- should be replaced by an "adaptive markets" hypothesis that accounts for psychological factors and responses. He is currently working to formalize the hypothesis mathematically and to implement predictive models of equity risk premium and other stock-­market returns using high-performance parallel processors.

Lo is perhaps best known for a study published in 2002 in which he and Dmitry Repin of Boston University used a polygraph-like system to measure the physiological responses of securities traders as they did their jobs; the researchers concluded that emotions like anxiety and fear play a large role in financial decision-making, and that they may have more influence on less experienced workers than on seasoned veterans. "Within five years, neuroeconomics will become mainstream," says Lo. "In 15 to 20 years, it will be fully accepted."

Well before then, expect to see the influence of "neuromarketing" on advertising. Recent experiments have imaged people's brains as they chose between brand names, even movie trailers. Researchers believe that by recording which brain areas are activated during choices, they are starting to be able to predict preferences based on brain scans alone. Some marketing experts believe such research could be used to supplement product surveys and might, eventually, indicate how to ignite pleasurable feelings in consumers at the prospect of rewards.

All of this raises questions about privacy and individual autonomy -- and how society might wish to regulate much more effective advertising. "As corporations learn to take further advantage of our weaknesses, we may soon be asking for government to take on the role of protector and guarantor of our privacy, happiness, and savings," says Peterson, who is a managing partner of San Francisco firm Market Psychology Consulting.

That may sound a little excessive. But neuroeconomists are thinking about the influence their work could have on public policy. One of the earliest neuroeconomics papers to address policy implications, "Addiction and Cue-Triggered Decision Processes," by Stanford economists Douglas Bernheim and Antonio Rangel, makes some sensible recommendations. The researchers propose a mathematical theory of addiction (essentially, an economic model) that takes into account findings from brain scans of recovering addicts and physiological measurements from the reward pathways of animal brains. The theory provides a way to determine, for instance, the probability that a recovering alcoholic will drink, depending on the placement of beer cans in a supermarket. It also predicts the effects of addictive-substance policies on the welfare of addicts and casual users -- which could be used to compare the socioeconomic consequences of, say, raising taxes on alcohol or subsidizing rehabilitation programs. According to Rangel, this kind of analysis might also apply to other behaviors, like compulsive shopping. The hope is that such models, grounded in the latest neurobiological thinking, will better inform policymakers and lead to more intelligent legislation.

Neuroeconomics seems to be a promising step toward a more unified theory of human behavior. Indeed, by opening up the brain and studying how its circuits produce economic decisions, scientists may provide answers to some of the questions debated by philosophers for centuries. Why do we make the choices we make? And why is it so hard to figure out what we really want?