Sunday, July 27, 2008

Neuro-economics adding to behavioral economics

Source: "Neuroeconomics: Do economists need brains?" The Economist, July 24th 2008.

Subtitled "A new school of economists is controversially turning to neuroscience to improve the dismal science," this article states:
In the late 1990s a generation of academic economists had their eyes opened by Mr LeDoux’s and other accounts of how studies of the brain using recently developed techniques such as magnetic resonance imaging (MRI) showed that different bits of the old grey matter are associated with different sorts of emotional and decision-making activity......

These new neuroeconomists saw that it might be possible to move economics away from its simplified model of rational, self-interested, utility-maximising decision-making. Instead of hypothesising about Homo economicus, they could base their research on what actually goes on inside the head of Homo sapiens.

The dismal science had already been edging in that direction thanks to behavioural economics. Since the 1980s researchers in this branch of the discipline had used insights from psychology to develop more “realistic” models of individual decision-making, in which people often did things that were not in their best interests. But neuroeconomics had the potential, some believed, to go further and to embed economics in the chemical processes taking place in the brain.
Comments: It has long seemed to me that economics should use better models of human decision making. For example, I have long wanted to see a model of race track gambling, using complexity theory, which recognized that the gamblers at the track come from a population with differing levels of information on the abilities of horses and jockeys and of the track conditions that influence race outcomes, and have differing opinions of the probabilities of race outcomes. Would it not be interesting to see whether models could predict pari mutuel betting outcomes of ensembles of betters?

I also welcome an increased understanding of the way the brain thinks and thus of the real way in which people choose courses of action. It would be great if the convergence of research from various fields would lead us to approaches which would enable more rational policy making.
JAD

2 comments:

Anonymous said...

Interesting thoughts re: racetrack betting, though I wonder if you are suggesting that these betting patterns arise from simply a knowledge problem?

I suspect that individual behavior appears irrational because their utility maximization function is maximizing for T-n (where n is a number between 0 and the current age of the individual) rather than T=now. Which is to say, my guess is that Freudonomics is the next evolution for homo economicus :)

John Daly said...

Thanks for the interesting comment.

I have seen data suggesting that the odds at the racetrack are generally pretty good for the average horse in a race, but tend to underestimate the probability of favorites winning and overestimate the probability of a win by a longshot.

I think horseraces are truly random events, with unknowable conditions of the horse and jockey and unpredictable aspects of the track and the placing of the horses during the course of the race affecting the outcome.

I also think that a racetrack crowd will include people who know a lot about horses and racing and can make pretty accurate estimates of odds, people who haven't a clue and are making essentially random bets, and everything in between.

The accuracy of the betting pool is probably an example of a phenomenon that is interesting in itself -- the average of estimates made by a crowd in a situation like this is better than the estimates made by the individuals in the crowd.

It would also be interesting to see whether the bets at the end of parimutual betting are better judged than those at the beginning. Expert betters should wait until the odds were almost fixed before deciding whether to bet, while for the random better anytime might do as well.

One thing that seems clear is that betters generally enjoy the races and the excitement of gambling, so that there is a payoff even from a losing bet.

You may well be right that delving into the subconscious will be an emerging field between economics, psychology and psychiatry. I wonder whether one might find games and gambling in controlled circumstances to be a useful diagnostic tool?