It's neuro-economics, stupid

It's taken a while to reach the popular press, but today's Times features a two-page spread on neuro-economics, by Mark Henderson. Surprisingly, it ain't half bad: Why say no to free money? It's neuro-economics, stupid. The piece starts with an account of the 'ultimatum game', which show that people care about fairness:

...Homo sapiens is clearly not Homo economicus, the ultra-rational being imagined by many professional economists. An emerging fusion of economics, evolutionary psychology and neuroscience — neuro-economics in the jargon — is now starting to tell us why this is so.

Scientists yesterday published new evidence in the journal Science, showing not only how the brain makes difficult decisions but also that our choices can be changed when a critical part of the brain is switched off with magnets.

The researchers, Ernst Fehr and Daria Knoch, of the University of Zurich, used a technique called transcranial magnetic stimulation to tire out and thus temporarily suppress a part of the brain called the dorsolateral prefrontal cortex (DLPFC). Functional magnetic resonance imaging scans show that this is particularly active when people play the ultimatum game.

When the right DLPFC is shut down, the way they play starts to change. When given a low offer, they still feel it is deeply unfair. But, instead of rejecting it as they usually would, their selfish, ultra-rational side wins out over their emotional reaction against the other player’s meanness. They accept any amount of cash, however small.

The implication is not that the DLPFC is generating a sense of injustice — that was still there even when the region was knocked out. Rather, it seems to be more like an executive decision-maker, balancing the claims of emotion and reason.

“It is as if it is the referee that enforces fairness, and overrides narrow self-interest,” said David Laibson, Professor of Economics at Harvard University.

The results tend to support a very different theory of human behaviour from that favoured by classical economists. Our decisions seem not to be determined mainly by reason, but by a continuous battle between two sides of our psyches that are rooted in different mental circuits.

For those interested, the Science article by Daria Knoch, et al, can be found here: Diminishing Reciprocal Fairness by Disrupting the Right Prefrontal Cortex

The Times piece goes on to discuss the potential relevance of neuroeconomics:

George Loewenstein, Professor of Economics and Psychology at Carnegie Mellon University, in Pittsburgh, and one of the pioneers of neuro-economics, said: “The new science of neuro-economics is lending support to a very ancient view of human behaviour. That is the idea that there is a conflict and interaction between passion, and reason and self-interest.

“The now standard view of people as rational maximisers of self-interest is a very recent view. Neuroscience is telling us that that was a bit of a diversion. The rational side is a process that sometimes overrides the dominant interest on human behaviour, which is the passionate side.”

Interestingly, the DLPFC does not develop fully until early adulthood, offering a possible explanation for adolescent selfishness — the “Kevin the teenager” phenomenon.

Why might the brain want to overrule self-interest in the first place? Colin Camerer, Professor of Business Economics at the California Institute of Technology, says that it probably evolved that way.

If we always accepted low offers for the sake of tiny gains, we would rapidly get a reputation as a soft touch. Everybody else would try to bilk us at every turn. By acting apparently against our interests, we do better in the long run. Our ancestors were better at surviving if they were bloody-minded. Professor Camerer explained: “Emotion is nature’s way of letting people know that if you’re treated badly you’ll do something about it.”

Professor Laibson said: “One prospect is that, as we understand this brain research, we will be able to go beyond tweaking the classical model and develop a much richer understanding of how people make choices.”

What is starting to emerge is a more accurate — and recognisable — picture of human nature than classical economic theory provided. In many ways, it is a positive one, helping to explain the human capacity for kindness and co-operation, and the centrality of fairness to social norms. We are not acquisitive automatons conditioned always to follow narrow self-interest.

But it also has a dark side. The depth with which we feel injustice, and the way we respond to it emotionally, rather than rationally, may also underlie extreme reactions to perceived wrongs. The gang leader who has a rival murdered over a slight to his honour and the fundamentalist who takes out his grievance against the West by becoming a suicide bomber are both particularly high-stakes players of the ultimatum game.

The article has an accompanying article, Three ways science tells us that we're not as rational as we think, which cites three examples of neuroeconomics research.

Comments

[Arthur Eckart]

It's possible greater utility, or satisfaction, is derived from the other person losing more. Perhaps, this is why some people want higher taxes for the rich (e.g. inheritance taxes). Does that make people who play in casinos or lotteries irrational? At what level will the odds against them be high enough not to play at all?

[Arthur Eckart]

Also, I may add, if the sum was 10 million instead of 10, how many would reject 2.5 million (or 1 million)?

[A. PERLA]

Eckart: "Perhaps, this is why some people want higher taxes for the rich (e.g. inheritance taxes)."

"Some people" want the rich to share more because they have more.

More so, most of the rich, apart from the new rich, have inherited and not made the least effort to earn their wealth. (Unless the word "earning" means waiting around for portfolio growth to offer its rents.)

Social harmony, and therefore economic fairness, is also a matter of self-interest. The French revolution comes to mind as an example, given the social upheaval that ensued. But, that historical fact was simply an exagerration of the cleavage between the haves and the have-nots.

Social harmony is a necessary element of any nation that cares for its ultimate survival and well-being. The continued accumulation of most of the riches by just a small percentage of the population is not conducive to such.

Communism has proven that all people possessing a common share of the wealth is unworkable. But, it is not yet proven than 80% of the wealth going to 20% of the population is a viable alternative either.

Communism is dead. But, then, maybe unbridled capitalism is also on its way out. Time will tell.

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