The field of neuroeconomics has gained a lot of traction in recent years. But Yale Economist Robert Shiller says a “neuroeconomics revolution” has only just begun.
In an article for Project Syndicate, Shiller says this revolution has “passed some key milestones quite recently”, in particular the publication of Paul Glimcher’s Foundations of Neuroeconomic Analysis. “Much of modern economic and financial theory is based on the assumption that people are rational, and thus that they systematically maximize their own happiness, or as economists call it, their ‘utility,'” Shiller writes. Glimcher and others are skeptical of that, and are looking for a “physical basis” for that assumption in the brain. “While Glimcher and his colleagues have uncovered tantalizing evidence, they have yet to find most of the fundamental brain structures,” Shiller says. “Maybe that is because such structures simply do not exist, and the whole utility-maximization theory is wrong, or at least in need of fundamental revision. If so, that finding alone would shake economics to its foundations.”
Neuroscientists are also looking into the issue of how the brain deals with ambiguous situations; it has already been discovered that decisions made when probabilities of outcomes are clear are processed in different areas of the brain than are decisions made when probabilities of outcomes are uncertain. “This research might help us to understand how people handle uncertainty and risk in, say, financial markets at a time of crisis,” Shiller says.
All in all, Shiller says discoveries in neuroscience could have huge implications in our understanding of economics. “It is likely that one day we will know much more about how economies work — or fail to work — by understanding better the physical structures that underlie brain functioning,” he says. “Those structures — networks of neurons that communicate with each other via axons and dendrites — underlie the familiar analogy of the brain to a computer — networks of transistors that communicate with each other via electric wires. The economy is the next analogy: a network of people who communicate with each other via electronic and other connections.”