Neuroeconomics

Neuroeconomics is the field of economics that explains the human decision making behavior. It explains the ability of humans to choose one option from the given alternatives. It’s a combination of behavioral economics and psychology and it also uses biology to explain how brain makes a decision. Choosing an alternative from the options is a logical activity that involves the use of brain. While forming models we use an assumption that consumers are rational and will maximize their utilities. Most of the economic models are based upon the rationality of consumers. Therefore analysis of this function of brain is an important field of study. Neuroeconomics involves techniques from neuroscience, economics and psychology and unifies them all to understand human decision making.

For e.g. when decisions are made for the uncertain future the consumer analyses various options in the form of the expected utility it will get from the decision. The option with most certainty and higher utility is chosen. It has been found that multiple brain areas are used in making this decision. Neurotransmitters dopamine and serotonin play major role in the decision making.

It is also used to analyze inter-temporal choice. In the actual world the decisions are made by real consumers who are not always rational. David laibson a Harvard economist studied the consumption behavior of people. In a survey people were asked two questions: What would you prefer?

  1. One candy today or two candies tomorrow?
  2. One candy in 100 days or 2 candies in 101 days?

Most of the people said to part 1 that they want one candy today and to part 2, two candies after 101 days. This shows that people are more patient in the long run. This reveals that consumer preferences are time inconsistent. Decision making depends upon the time frame. In the short run people may end up consuming more and hence have very little saving. The willingness for instant gratification may result in consumers being irrational and making time inconsistent decisions.

A few economists criticize the result by claiming that after 100 days it will again return to the short term decision of one candy today and two candies tomorrow. And again the consumer will show the same behavior.

It is not a very well known field of economics yet it is significantly important in the areas of research. By connecting biological and social sciences, neuroeconomics is helping researchers to understand the complex human behaviors. It provides a potential to the evolution of decision making behaviors. It provides economists, psychologist and neurologist with deeper understanding of human behavior under various situations and how the brain makes it happen. It is an integrated way of understanding how people arrive to their ‘revealed preferences’

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