Video: Neuroscience, Neuroeconomics, and Tough Moral Decision Making

Found this via the very cool Situationist blog.

“Catching the brain during tough moral decision making”

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Neuroeconomic theory: Using neuroscience to understand the bounds of rationality

Click Here To Read: Neuroeconomic theory: Using neuroscience to understand the bounds of rationality

Synopsis (via Brocas & Carillo Voxeu)

Introduction (via Voxeu)

People often fail to make “rational” decisions. Economic agents are subject to multiple biases that affect the way they perceive events, act upon them, and learn from experience. Most of these anomalies are remarkably persistent and are widely documented in real world and laboratory environments by behavioural data.

To cite just a few, individuals have systematically biased beliefs about:

the prospects of their entrepreneurial endeavours,
the amount they need to save for retirement, and
the size of the mortgages they can afford.

These behaviours cannot be ignored since they may have disastrous consequences for the economy – as we have recently witnessed during the subprime mortgage crisis. Knowing what type of mistakes and biases are prevalent is an important starting point. The main challenge, however, is to understand why they emerge, so that they can be predicted and, possibly, avoided.

Click Here To Read: Neuroeconomic theory: Using neuroscience to understand the bounds of rationality

The Neuroscience of Money: Finding How Traders Tick

I’m back….

H/T Anibal

Click Here To ReadThe Neuroscience of Money: Finding How Traders Tick

Introduction (via USB)

However complex decisions about risk might be, it takes little to impact the outcome: Just show people pictures of erotic scenes or rotten food.

In a forthcoming study by Northwestern University assistant finance professor Camelia Kuhnen and a Stanford University colleague, associate psychology and neuroscience professor Brian Knutson, 28 research recruits were asked to make 90 decisions on asset allocation that ranged from safe to volatile – but not before they were flashed pictures to first stoke an emotional reaction.

It turns out people are more reluctant to make a risky investment after seeing an image of moldy peaches and more likely to go for risk after being aroused.

What this shows, say researchers, is that decisions about financial risk can be affected by emotional response. This research builds on the team’s earlier findings and other studies showing some of the brain links that generate emotional states also process information about risk, and the results could go a long way toward helping behaviorists determine whether there’s a genetic basis for risk appetite – and how that might translate to conscious action by financial advisors, traders or chief risk officers.

Click Here To ReadThe Neuroscience of Money: Finding How Traders Tick

Social Neuroeconomics: The Neural Circuitry Of Social Preferences

This paper discusses the neural circuitry involved in altruistic, fair and trusting behaviors. Enjoy!

Social Neuroeconomics: The Neural Circuitry Of Social Preferences

Abstract (Via Kellogg)

Combining the methods of neuroscience and economics generates powerful tools for studying the brain processes behind human social interaction. We argue that hedonic interpretations of theories of social preferences provide a useful framework that generates interesting predictions and helps interpret brain activations involved in altruistic, fair and trusting behaviors. These behaviors are consistently associated with activation in reward-related brain areas, such as the striatum, and with prefrontal activity implicated in cognitive control, the processing of emotions, and integration of benefits and costs, consistent with resolution of a conflict between self-interest and other-regarding motives.

Introduction (Via Kellogg)

As in behaviorist psychology, the long-standing tradition in economic theory has been to treat preferences and beliefs as impossible or difficult to observe directly; instead, their effects were thought to be only revealed by direct choices. The emerging neuroeconomic approach [1–4] rejects the premise of unobservability, and seeks a microfoundation of social and economic activity in neural circuitry, using functional magnetic resonance imaging (fMRI), transcranial magnetic stimulation (TMS), pharmacological interventions and other techniques. The neuroeconomic approach hopes to unify mechanistic, mathematical and behavioral (choice-based) measures and constructs. Byproducts of such an ambitious program might include better understanding of individual differences and development over the human lifecycle (including disorders and expertise), insights into the effects of direct and social learning, empirical discipline of evolutionary modeling, and advice for how economic rules and institutions can be designed so that people react to rules in a socially efficient way.

Social Neuroeconomics: The Neural Circuitry Of Social Preferences

The Case for Mindless Economics

How does neuroeconomics change the basic methods of economics? Find out below

Click Here To Read The  For Case Mindless Economics

Abstract (Via Princeton)

Neuroeconomics proposes radical changes in the methods of economics. This essay discusses the proposed changes in methodology, together with the the neuroeconomic critique of standard economics. We do not assess the contributions or promise of neuroeconomic research. Rather, we offer a response to the neuroeconomic critique of standard economics.  This research was supported by grants from the National Science Foundation. We thank Drew Fudenberg and

Introduction (Via Princeton)

Neuroeconomics proposes radical changes in the methods of economics. This essay discusses the proposed changes in methodology, together with the the neuroeconomic critique of standard economics. Our definition of neuroeconomics includes research that makes no specific reference to neuroscience and is traditionally referred to as psychology and economics. We identify neuroeconomics as research that implicitly or explicitly makes either of the following two claims:
Assertion I: Psychological and physiological evidence (such as descriptions of hedonic
states and brain processes) are directly relevant to economic theories. In particular, they
can be used to support or reject economic models or even economic methodology.
Assertion II: What makes individuals happy (‘true utility’) differs from what they
choose. Economic welfare analysis should use true utility rather than the utilities governing
choice (‘choice utility’).

Click Here To Read The  For Case Mindless Economics

On Money, Risk and the Brain

Very brief overview of neurofinance it’s uses and contributions…

H/T Phil

Click Here To Learn About  Money, Risk and the Brain

Abstract (Via Kellog)

In the past few years neurofinance has emerged as a new field in economics and finance. The small but growing number of economists and neuroscientists involved in this new field have a common goal: to understand how people make economic decisions by analyzing how the brain works when these choices are made. The rise of the field was generated by the failure of the standard rational agent model used by economists in the last 50 years to explain a significant number of decisions made by individuals. Deviations from the optimal choices predicted by the standard model have been documented in the behavioral economics and behavioral finance literature for two decades. However, we still do not have a parsimonious new model that can explain all behaviors exhibited by economic agents, including the so-called deviations from those predicted by the standard model.

Introduction (Via Kellog)

Neurofinance (also referred to as neuroeconomics) is trying to provide this new model of economic decision-making, based on how our brain operates when we are faced with choices. The failure of the standard model could potentially be caused by the lack of realism in its assumptions. Tools available to neuroeconomists allow for these assumptions to be tested — for instance, we can find out whether the brain tracks expected values, risk, or inter-temporal discount factors. By looking inside the brain we can create a more realistic model of decision-making which hopefully is both parsimonious, and able to explain a much wide range of individual economic behaviors compared to the standard model. This article will review some of the puzzles (or deviations from the standard model) documented in behavioral economics and behavioral finance, and then describe several neuroeconomics studies that try to explain these puzzles by examining brain activation during decision-making.

Excerpts (Via Kellog)

The potential to use brain scans to learn what people really like, dislike or can do, is the main reason why companies have started to conduct neuromarketing studies and measure brain activation while individuals are presented with various products.

Findings from neuroeconomics can be used by policy makers, too, in order to increase social welfare. For instance, if the government wants to encourage workers to save more for retirement, it may design markets or financial policies that trigger the right part of the limbic system to induce the desired behavior.

Click Here To Learn About  Money, Risk and the Brain

The Neural Basis of Financial Risk Taking

Using neuroscience to understand risk taking, rationality, and decision making.

(H/T Phil Ordway)

Click Here To Learn About The Neural Basis of Financial Risk Taking

Abstract (Via Neuron)

Investors systematically deviate from rationality when making financial decisions, yet the mechanisms responsible for these deviations have not been identified. Using event-related fMRI, we examined whether anticipatory neural activity would predict optimal and suboptimal choices in a financial decision-making task. We characterized two types of deviations from the optimal investment strategy of a rational risk-neutral agent as risk-seeking mistakes and risk-aversion mistakes. Nucleus accumbens activation preceded risky choices as well as risk-seeking mistakes, while
anterior insula activation preceded riskless choices as well as risk-aversion mistakes. These findings suggest that distinct neural circuits linked to anticipatory affect promote different types of financial choices and indicate that excessive activation of these circuits may lead to investing mistakes. Thus, consideration of anticipatory neural mechanisms may add predictive power to the rational actor model of economic decision making.

Excerpt (Via Neuron)

Individual investors systematically deviate from optimal behavior, which could influence asset valuation (Daniel et al., 2002; Hirshleifer, 2001; Odean, 1998). The causes of these deviations have not been established, but emotion may have some influence. While some research has examined the role of emotion in decision making (Camerer et al., 2005; Loewenstein et al., 2001) and economists have begun to incorporate emotion into models of individual choice (Bernheim and Rangel, 2004; Caplin and Leahy, 2001), scientists still lack a mechanistic account of how emotion might influence choice. Understanding such mechanisms might help theorists to specify more accurate models of individual decision making, which could ultimately improve the design of economic institutions so as to facilitate optimal investor behavior.

Here, we sought to examine whether neural activation linked to anticipatory affect would predict financialchoices.

Click Here To Learn About The Neural Basis of Financial Risk Taking

An interview with Jason Zweig, author of Your Money and Your Brain.

Jason Zweig wrote one of my favorite primers on neuroeconomics, “Your Money & Your Brain”. Here’s a recent interview with Zweig at Morningstar.

Click Here To Read An Interview With Writer &Author Jason Zweig

(H/T AR)

Introduction (via Morningstar)

The Physiology of Moral Sentiments

How human oxytocin mediated empathy reveals moral sentiments.

(H/T Cynthia for finding this paper)

Click Here To Read About The Physiology Of Moral Sentiments

Introduction (Via SSRN)
Adam Smith made a persuasive case that moral sentiments are the foundation of ethical behaviors in his 1759 The Theory of Moral Sentiments. This view is still controversial as philosophers debate the extent of human morality. One type of moral behavior, assisting a stranger, has been shown by economists to be quite common in the laboratory and outside it. This paper presents the Empathy-Generosity-Punishment model that reveals the criticality of moral sentiments in producing prosocial behaviors. The model’s predictions are tested causally in three neuroeconomics experiments that directly intervene in the human brain to turn up and turn down moral sentiments. This approach provides direct evidence on the brain mechanisms the produce prosociality using a brain circuit called HOME (Human Oxytocin-Mediated Empathy). By characterizing the HOME circuit, I identify situations in which moral sentiments will be engaged or disengaged. Using this information, applications to health and welfare policies, organizational and institutional design, economic development, and happiness are presented.

Click Here To Read About The Physiology Of Moral Sentiments

Is Your Investing Personality in Your DNA?

I was lucky to meet Zweig at CIMA here’s his latest piece via the WSJ.

Click Here To Learn About Your Genetic Investing Personality Type

Article Introduction (Via Zweig @ WSJ)

Maybe your DNA made you do it.

Whatever investing mistake you have committed lately, there is probably a gene that is often associated with that behavior. Are you predestined to be the prisoner of your genetic code?

To find out, I recently spent a day at the University of Pittsburgh getting a battery of DNA analyses and brain scans. I consider myself a patient and disciplined investor, so I volunteered as a guinea pig in Ahmad Hariri’s imaging genetics lab to learn how my genes and brain activity shape my behavior. The results shocked me.

After I spit into a cup, Dr. Hariri had my DNA analyzed to find out which form I have of five genes that influence the brain circuits that generate decisions about risk and reward over time. His findings: In all five genes, I have a variant, or allele, that is sometimes associated with bad investing decisions.

Consider the FAAH gene. Roughly 25% of people with European ancestry carry the 385A allele of this gene. That tends to damp their brains’ fear circuitry and to intensify their brains’ reaction to the prospect of making money. I am one of those people.

Additional Article Excerpts (Via Zweig @ WSJ)

There is always a tug of war inside each of us between nature and nurture. But during scary times like these, says Dr. Hariri, “environmental stresses can play a critical role in unmasking any underlying biases determined by your genes.” In other words, bear markets give nature the upper hand. It is now harder than ever to stick to the disciplines that can override your genetic impulses, but it also has never been more important.

Click Here To Learn About Your Genetic Investing Personality Type