Neuroeconomics

Question 1

What is Neuroeconomics?

Answer 1

• Combines methods from neuroscience and economics to better understand how the human brain generates decisions in social and economic context.
• The study of biological micro-foundations (e.g. brain systems, neutrons, heart rate, and neurotransmitters) of economic cognition (e.g. mental representation, learning, preferences and decision-making).

Question 2

What does it mean “as-if” vs Neuroeconomics

Answer 2

Economic models assume that individuals make choices as if maximising a pre-specified utility function s.t. feasibility and informational constraints.

Behavioural economics developed alternative models of economic behaviour, again on assumptions of non-standard beliefs, non-standard preferences, etc => these models are “black box” models: working on “as if” assumptions e.g. as if individuals are rational, as if they have hyperbolic preferences, etc.

Question 3

Why study the brain?

Answer 3

Three reasons:

1. To improve our measurements of utility scientifically
2. To speed up the development of new models
3. Provide new empirical methods that may provide new empirical tests.

Question 4

Brain imaging methods

Answer 4

1. Electro-encephalogram (EEG): - measures electrical potentials at the skull caused by neural activity
   Pros:
   - good temporal resolution
   Cons:
   - poor spatial resolution
   - have to repeat the same situation
   - eye movements also create electric activity - noisy data so not well-suited
2. Functional Magnetic Resonance Imaging (fMRI)
   = measures activity by red blood cells which have different magnetic properties depending on the amount of oxygen
   - increased neuronal activity in the brain uses up oxygen such that initially the oxygen level falls then it is overcompensated when it moves to the activated are
   Pros: - better spatial resolution
   Cons: - stochastic time lags, costly and unnatural experiments, poor temporal resolution

Question 5

Pharmaceutical methods

Answer 5

Neurotransmitters e.g. dopamine, serotonin
Neurohormones e.g. oxytocin
Sexual hormones e.g. testosterone, estrogen
Stress hormones, e.g. cortisol
=> Studies involve administering drugs that stimulate particular receptors and compare before and after

Question 6

Limitations of methods

Answer 6

1. limited and non-representative sample
2. non-human may respond differently than human (animal experiments)
3. costly and unnatural experiments - you cannot expect people to behave exactly like that in a natural scenario - external validity is questionable

Question 7

Brain System

Answer 7

1. Affective system: fast, unconscious, myopic and effortless
2. Cognitive system: slow, conscious, far-sighted, effortful and exhaustible

=> Affective is the most immediate, compulsive reaction

Question 8

Sanfey et al. (2003)

Answer 8

Neural basis in Ultimatum Game:
Design:
1. Player A: has $10 and makes and offer x to Player B
2. Player B: can either accept or reject the offer
3. Responder’s brain activations are measured by fMRI
4. A responder faces each of the conditions ten times and some from a human partner, and some from a computer partner

Hypothesis:

1. Test whether unfair offers activate both the emotional (affective) and the cognitive (analytical) systems
2. Test which areas are more activated when subjects face the offer of a human proposer relative to a computer

Results:

1. regions showing stronger activations are emotion-related - unfairness, etc
2. compared to computer, the same regions show more activation if the offer is from a human

Question 9

Kosfeld et al (2005)

Answer 9

Setup:

• Two players: 1. Truster and 2. Trustee
• The truster trusts the trustee to send back the money =>element of risk
• Oxytocin group - were administered the drug
• Placebo-controlled group

Hypothesis: oxytocin increases trust and investors in the oxytocin group will show more money transfers than placebo group.

had to rule out risk aversion - oxytocin does not affect attitudes to risk or inequality

Results: oxytocin increases trust in humans

Question 10

McClure et al. (2004)

Answer 10

Separate Neural Systems value immediate and delayed monetary rewards
Hypothesis: the difference between SR and LR preferences reflects the different activation of neural systems.
Summarised by the parameters
β = special weight on immediate outcomes
δ = weighting of time periods

SR impatience: driven by the affective system, preferential to immediate rewards - impulsive => β, limbic structures
LR patience: cognitive, able to evaluate trade-offs between abstract and future rewards. => δ

Question 11

Coates et al. (2009)

Answer 11

2D-4D ratio predicts success among financial traders, has been a marker for men
Men have more testosterone - correlated/associated with risk-seeking behaviour

Design:
Study on only male traders and checked 2D-4D ratio. the Hypothesis: Lower the ratio, the greater the success as a trader

Results:
Did not reject hypothesis, increase risk preferences and the ratio can predict long-term profitability