Neuroeconomic theory: Using neuroscience to understand the bounds of rationality
Synopsis (via Brocas & Carillo Voxeu)
Why do people persistently make seemingly irrational decisions? This column introduces neuroeconomic theory, which uses neuroscience and neurobiology to try to shed light on the black box of human decision-making.
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.