[Marxism] The Economics of Brains

Les Schaffer schaffer at optonline.net
Sat May 14 08:15:48 MDT 2005

there is a move afoot to patch up traditional economics theory, 
replacing the "rational human being" with a more complex model that is 
also in tune with today's neuroscience. here is a review article i found 
at Technology Review several weeks ago. i enclose it in its entirety, as 
i assume there are others here who would be interested in taking a swat 
at this approach.

for myself, i much appreciate a lot of the correlations that 
contemporary neuroscience has shown us between human behavior and brain 
excitation states. however, even as pointed out below, there is little 
causative connection being made yet. the approach outlined here is one 
of continued focus on the individual player, sans class -- indeed, sans 
collective behavior of any kind. the individual here is less "rational", 
more adaptive, capable of passion and error and addiction. but homo 
economicus is still wandering aimlessly around in the marketplace, 
smelling trouble, spending in fear, but never quite making the abstract 
connections amongst the economic players and their classes that might 
explain why something seems so amiss. and connections is something that 
contemporary neuroscience, after all, tells us our brains are so 
exquisitely fashioned to produce.

neuroecon also has a snazzier look, smelling more scientific (who can 
argue with MRIs?) and is more fund-able as a technology. see the section 
below on use of parallel-processing for making predictions from an 
adaptive markets hypothesis of value to brokers. should capture a 
venture capitalist or two.

i have an easy time imagining an "socialist neuroecon" that might 
include this stuff in some fashion. but i also fancy that if brother 
Karl were around today and wanted to write a "Critique of Political 
Economy", he'd smack this one out of the ballpark.

les schaffer


The Economics of Brains

By Gregory T. Huang
MIT Technology Review
May 2005

    Articles reviewed:

    "Addiction and Cue-Triggered Decision Processes", B Douglas Bernheim
    and Antonio Rangel, The American Economic Review, December 2004

    Neuroeconomics: How Neuroscience Can Inform Economics", Colin
    Camerer, George Loewenstein, and Drazen Prelec, J. of Economic
    Literature, March 2005

    Neurally Reconstructing Expected Utility, Brian Knutson and Richard
    Peterson, Games and Economic Behavior (in press)

    The Adaptive Markets Hypothesis: Market Efficiency from an
    Evolutionary Perspective, Andrew W. Lo, The Journal of Portfolio
    Management, 30th Anniversary Issue, 2004

    Separate Neural Systems Value Immediate and Delayed Monetary
    Rewards, Samuel M McClure, David I Laibson, George Loewenstein, and
    Jonathan D Cohen, Science, October 15, 2004

Traditional economic theory assumes that human beings behave rationally. 
That is, that they understand their own preferences, make perfectly 
consistent choices over time, and try to maximize their own well-being. 
This peculiar assumption has its roots in dusty essays like “Exposition 
of a New Theory on the Measurement of Risk” (from 1738) by Daniel 
Bernoulli and scholarly tomes like Theory of Games and Economic Behavior 
by John von Neumann and Oskar Morgenstern (published in 1944). The idea 
has some validity: traditional economic theory is good at predicting 
some market behaviors, such as how the demand for products like gasoline 
will change after a tax hike. But it’s not very good at describing 
more-complex phenomena like stock-price fluctuations or why people 
gamble against the odds.

The problem, of course, is that people don’t always behave rationally. 
They make decisions based on fear, greed, and envy. They buy plasma TVs 
and luxury vehicles they can’t afford. They don’t save enough for 
retirement. They indulge in risky behavior such as gambling. Economists 
understand this as well as anyone, but in order to keep their 
mathematical models tractable, they make simplifying assumptions. Then 
they try to adjust their equations by adding terms that account for 
“irrational” behavior. But if economists could develop models that 
accounted for the subtleties of the human brain, they might be able to 
predict complex behaviors more accurately. This, in turn, might have any 
number of practical applications: investment bankers could hedge against 
financial euphoria like the Internet boom; advertisers could sell 
products more winningly.

The idea that understanding the brain can inform economics is 
controversial but not new; for 20 years, behavioral economists have 
argued that psychology should have a greater influence on the 
development of economic models. What is new is the use of technology: 
economists, like other researchers, now have at their disposal powerful 
tools for observing the brain at work. The most popular tool, functional 
magnetic resonance imaging (fMRI), has been around since the late 1980s; 
but only in the past few years has it been used to study 
decision-making, which is the crux of economic theory.

The result is the emerging field of “neuroeconomics.” A flurry of recent 
papers in scientific and economic journals—reviewed in the Journal of 
Economic Literature by Caltech economics professor Colin Camerer and 
colleagues—shows how researchers are using the neural basis of 
decision-making to develop new economic models. At the January meeting 
of the American Economic Association, the world’s largest economics 
conference, the neuroeconomics sessions were reportedly standing room 
only. The hope seems to be that biological research will finally help 
economists make sense of irrationality.

Take recent brain-imaging experiments by Princeton University 
psychologist Samuel McClure. In the journal Science, ­McClure and 
colleagues report that when subjects choose short-term monetary rewards, 
different regions of the brain are active than when they choose 
long-term ones. People don’t “discount” future rewards according to a 
simple scheme, as many economists have suggested. It seems the brain 
actually makes short-term and long-term forecasts in different ways. The 
challenge for economists lies in translating this sort of scientific 
insight into, say, predictive models of how people plan purchases or 
make retirement fund decisions.

If successful, neuroeconomics could help unify the social sciences and 
natural sciences—all with great societal impact. “We are at the very 
beginning of something radically new,” says Daniel Kahneman, the 
Princeton University psychologist who won the 2002 Nobel Prize in 
economics. “Technologically, we can expect that within the next decade 
or two there will be huge developments. The network of knowledge about 
the brain is expanding at a tremendous rate. That will certainly affect 
marketing and political psychology, and it could create a common 
database that nobody will want to ignore.”

Decisions, Decisions
It’s an intriguing idea: to rethink economic theory from the ground up, 
taking into account the workings of the human brain. For now, though, 
neuroeconomics is far removed from the day-to-day concerns of most 
financiers or CEOs.

The first thing to remember is that the field is very, very young. 
Neurological tools are still relatively crude. Brain-imaging techniques 
such as fMRI and positron emission tomography (PET) measure changes in 
blood flow and hence reveal the collective activity of thousands of 
neurons over a period of seconds. An electroencephalogram (EEG) uses 
electrodes on the scalp to measure the brain’s electrical activity on 
the millisecond time scale, but its spatial resolution is so poor that 
its use is limited. What’s more, imaging studies point out only 
correlations between brain activity and behavior. One must be careful in 
drawing neuro­scientific conclusions and making economic predictions.

Because their field is so young, and because they are pursuing different 
goals, economists and neuroscientists working in neuroeconomics 
sometimes seem to be talking about different things. For instance, 
Camerer and his colleagues write that “The foundations of economic 
theory were constructed assuming that details about the functioning of 
the brain’s black box would not be known....[But now] the study of the 
brain and nervous system is beginning to ­allow direct measurement of 
thoughts and feelings.” Most neuroscientists would disagree with the 
second point. Direct mea­surement of how groups of neurons interact and 
which brain areas are active during which physical and mental tasks, 
yes. But thoughts and feelings are subjective (see “The Unobservable 
Mind,” February 2005) and observable only by interpreting data.

In a similar vein, neuroscientists and psychologists have at times 
equated economic utility—the subjective value of a good or service—with 
the notions of reward and pleasure. These ideas may be related, but they 
are certainly not interchangeable. Nevertheless, early mutual confusion 
about both fields’ technical terms and bodies of knowledge is being 
resolved. “We are rapidly approaching a common language,” says Gregory 
Berns, a neuroscientist at Emory University.

A more fundamental issue for neuroeconomics is this: should economists 
care? Perhaps understanding how the brain works is more trouble than 
it’s worth. After all, some recent findings are not at first glance very 
economically enlightening. Anyone who has regretted an impulse purchase, 
for instance, would be unsurprised to learn that evaluations of 
immediate and delayed rewards use different parts of the brain. For now, 
neuroeconomics is subject to the criticisms that plague psychology: that 
its experiments show what is already intuitively obvious, and its models 
are descriptive, not quantitative. But Stanford psychologist Brian 
Knutson and psychiatrist Richard Peterson are trying to answer that 
criticism. Their paper in a forthcoming issue of Games and Economic 
Behavior reports that subjects seem to use different parts of their 
brains when they consider financial gains and when they consider 
financial losses; more recently, they have found that subjects use 
different parts again to evaluate the magnitude and probability of those 
gains and losses. Knutson and Peterson’s work is part of an increasing 
effort to figure out how economic utility may be coded quantitatively in 
various regions of the brain. If economists could track the different 
components of utility in a statistical way, they could understand why 
some people take risks and some don’t—and possibly predict their future 

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?

More information about the Marxism mailing list