TOWARDS A CONVERGENCE BETWEEN BEHAVIORAL ECONOMICS AND NEUROECONOMICS

Behavioral Economics and Neuroeconomics deal with the analysis of markets -as any branch of the Economy- but emphasizing the notable limitations and human biases when making economic calculation, and the decision-making issues that arise from this process.

From the point of view of Behavioral Economics, a lot of work has been done with models of limited rationality of the "multiple self" type (rather deliberative modules and rather emotional modules). Following the Nobel Prize winner Kahneman, two types of cognitive processes are defined: System 1, which he calls "intuition" and System 2, "reasoning":

“The operations of System 1 are fast, automatic, effortless, associative, and often emotionally charged; they are also governed by habit, and are therefore difficult to control or modify. The operations of System 2 are slower, serial, effortful, and deliberatively controlled: they are also relatively flexible and potentially rule-governed”

In neuro terms, Kahneman-style behaviorists generally describe the area comprised by the basal ganglia and the prefrontal mid cortex as an emotional module, which would interact (additively) with a second system organized around the posterior parietal cortex and the dorsolateral prefrontal cortex, forming a rational module.

On the side of pure neuroeconomists, such as Paul Glimcher (New York University), they tend to work with models of "unique self", showing a rational-emotional structure globally involved in valuation activities and preferences, and not so much systems 1 and 2 so marked.

The debate between behavioralists and pure neuroeconomists is interesting, since for the former there would be important evidence about the existence of "multiple selves" in our psyche, and the importance of conflict; however, they end up in general arguing that more empirical evidence is needed from the Neurosciences to define the debate, since the evidence in Neurosciences is deeper than that of traditional Psychology, especially since the boom of brain scans with magnetic resonance

In any case, and beyond the Glimcher-Kahneman debate, it is clear that the neuro system that sustains our decision-making is far more complex than the simplified version of neoclassical economics (JSMill's "homo economicus" utilitarian), where the human being is extremely selfish, hyper-rational and with unlimited will, which is totally false from the empirical point of view. Let's analyze case by case, where there is broad agreement between Behavioral Economics and Neuroeconomics:

(i) unlimited rationality;

(ii) unlimited will;

(iii) unlimited selfishness.

In relation to the attribute of unlimited rationality, human beings face serious restrictions of mental capacity and time and, therefore, we are rarely able to solve complex problems optimally. Consequently, the "rational" strategy in the face of these restrictions ends up being the adoption of practical rules that allow solving problems by saving on the use of time or their mental faculties. But, just as this strategy of bounded rationality can facilitate complex decisions, it can also lead to systematic errors, as Behavioral Economics has profusely demonstrated (aversion to losses, mental accounting, etc.).

In relation to the attribute of unlimited will, there are numerous examples of situations in which it can be affirmed that agents effectively know what is best for them, but do not opt ​​accordingly due to problems of self-control. These deviations occur in the case of addictions, but also in usually less severe cases, such as bad eating habits, sedentary lifestyle or simple procrastination (leave for tomorrow what can be done today), something that usually happens to the majority of people.

Finally, the neoclassical attribute of unlimited selfishness is also rebuttable and, happily, innumerable examples of altruistic behavior can be found, including the relative success of many national collections and volunteering in charities. Recent advances in Neuroeconomics, led by Paul Zak, demonstrate the key role of oxytocin in the brain for altruistic behaviors.

In the background, behaviorists and neuroeconomists are continuators of the theories of "limited rationality", which were already postulated by Herbert Simon in 1955 (Nobel prize in the '70s), where economic models that adopt the assumption of agents with " unlimited capabilities for information processing ", which led him to coin the term bounded rationality to describe a more realistic view of our imperfect decision process. We have already emphasized that, according to this vision, human beings face restrictions of mental capacity and time and, therefore, we are not always able to solve complex problems optimally.

And going even further back in time, behaviorists and neuroeconomists are continuators of J.M. Keynes in regard to the study of "animal spirits" in the decisions of consumption and investment, rather left aside by the original neoclassical models and their followers of the twentieth century.

Examples of Limited Rationality

Behavioral economics has observed several behaviors of ordinary people who violate the assumption of rationality when making consumer decisions. Here are some examples:

• Information avalanche: Consumers have to compare many options and characteristics which leads to confusion, to choose at random or even to not make any decision.
• Heuristic: Consumers often take shortcuts in their decisions, so for example, instead of analyzing all the information they just buy the same as their friends or family.
• Legacy: Consumers tend to be reluctant to change suppliers or brands for fear of making mistakes.
• Inertia: Consumers generally do not change providers when they have to make some effort (such as deactivating an automatic renewal clause).
• Myopia: Consumers tend to have a short-term vision privileging the current enjoyment instead of waiting to enjoy in the future. For example, when making long-term investment decisions or saving for retirement, consumers do not put enough value on future payments.
• Framework: Consumers are influenced by the form or framework in which the information is presented. Sometimes the same information presented in different ways leads consumers to make different decisions.
• Aversion to losses: the preference to avoid a loss is greater than the preference to win something.

Summarizing

Today the authors already talk about a branch of the Neuroeconomy called Behavioral Economics in the Scanner (BES), which tries to test via neuroimaging the concepts of the original Behavioral Economy. Undoubtedly, this connection will make the border between neuroeconomists and behavioralists more and more diffuse, making both fields converge towards common theoretical bodies.

Author: Sebastián Laza (neuroeconomist)