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Why Logic Often Takes a Backseat

Why Logic Often Takes a Backseat

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Published by: maanasag on Aug 03, 2009
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09/23/2010

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Why Logic Often Takes A Backseat The study of neuroeconomics may topple the notion of rationaldecision-making The National Hockey League and its players wrangle over a salarycap. The impasse causes the season to be canceled. Everybodyloses. What went wrong?According to the new science of neuroeconomics, the explanationmight lie inside the brains of the negotiators. Not in the prefrontalcortex, where people rationally weigh pros and cons, but deepinside, where powerful emotions arise. Brain scans show thatwhen people feel they're being treated unfairly, a small areacalled the anterior insula lights up, engendering the same disgustthat people get from, say, smelling a skunk. That overwhelms thedeliberations of the prefrontal cortex. With primitive brainfunctions so powerful, it's no wonder that economic transactionsoften go awry. "In some ways, modern economic life for humansis like a monkey driving a car," says Colin F. Camerer, aneconomist at California Institute of Technology.Until recently, economists contented themselves with observingpeople from the outside. Now, Camerer and others, teaming upwith psychologists and neuroscientists, are using a techniquecalled functional magnetic resonance imaging to look inside theskull. It's like watching Congress debate instead of inferringwhat's going on by reading the laws that get passed.Neuroeconomics, while still regarded skeptically by mainstreameconomists, could be the next big thing in the field. It promises toput economics on a firmer footing by describing people as theyreally are, not as some oversimplified mathematical model wouldhave them be. Eventually it could help economists designincentives that gently guide people toward making decisions thatare in their long-term best interests in everything from labornegotiations to diets to 401(k) plans. Says Harvard Universityeconomist David I. Laibson, another leading researcher: "Tounderstand the real foundations of our behavior and our choices,we need to get inside the black box."A GRAB BAG OF ANOMALIES?Neuroeconomics could also give economics an alternative
 
theoretical framework. Since the early 1900s, economists havemainly assumed that people have a stable and consistent set of preferences that they try to satisfy. When faced with anapparently illogical outcome -- such as the cancellation of thehockey season -- they try to explain it as the result of a reasoneddecision process. Such top economists as Gary S. Becker, MiltonFriedman, and Robert E. Lucas Jr., all Nobel prize winners, haveargued that discrimination, unemployment, and stock marketgyrations can have rational origins.In recent years, the assumption of rationality has taken somehard shots as economists have shown that people often lack self-control, are shortsighted, and overreact to the fear of losses. Butto date, these attacks on rationality -- under the broad heading of "behavioral economics" -- have seemed more like a grab bag of anomalies than a consistent alternative theory. So theassumption of rationality survives.By linking economic behavior to brain activity, however,neuroeconomics may finally supply the model that knocksmainstream economics off its throne. The new theory should fitbetter with reality, but it won't be as mathematically clean --because the brain is a confusing place, with different partshandling different jobs. Says Camerer: "You are forced to thinkabout a brain which has many somewhat modular circuits."One of the most fruitful avenues of neuro research is "timeinconsistency." When people decide about the distant future,they're roughly as rational as economic textbooks assume. Butwhen faced with a choice of whether to consume something nowor delay gratification, they can be as impulsive as chimps.Harvard's Laibson coined "quasi-hyperbolic discounting" todescribe the behavior, but that was just a label, not anexplanation.So Laibson and others scanned people inside MRI machines anddiscovered two parts of the brain operating in radically differentways. For decisions about the far-off future, the prefrontal cortextakes a long-term perspective. But for decisions such as whetherto buy another chocolate bar right now, the limbic system takesover and demands immediate gratification. Last year the journalScience published the research by Laibson, Princeton University
 
neuroscientists Samuel M. McClure and Jonathan D. Cohen, andCarnegie-Mellon University economist George Loewenstein.How does it help to know that you're literally "of two minds"? Youcould arrange your affairs to make sure that your rational brainstays in control -- for example, by committing now to saving acertain percentage of your paycheck each month in the future.Many people already do that. Trouble is, long-term commitmentscan be too rigid if circumstances change. Ideally, you'd like towait to commit to a savings plan until you see whether you canafford it -- but not wait so long that your animal brain takes overand you lose the will to save. The new research could help getthat balance right.A key tenet of standard economics is that making people happy isa simple matter of giving them more of what they like. Butneuroscience shows that's not true. The brain's striatum quicklygets used to new stimuli and expects them to continue. Peopleare on a treadmill in which only unexpected pleasures can makethem happier. That explains why happiness of people in richcountries hasn't increased despite higher living standards.Neuroeconomics also challenges the notion that emotions canonly corrupt economic decision-making. Indeed, emotions grabpeople's attention and motivate them to focus their rationalbrains on the issue at hand, says Antonio R. Damasio, aUniversity of Iowa College of Medicine neurologist who studiesbrain-damaged patients. In his writings, he says that people whofeel no emotions are bad at making decisions. The most controversial aspect of neuroeconomics is what to dowith its findings. Cornell University economist Robert H. Frankfavors taxation of conspicuous consumption, arguing that flashyspending simply raises expectations, making the rich no happierand squeezing the middle class. Laibson, in contrast, isn't willingto go much further than using neuroeconomics to, say, improvethe default choices in 401(k)s.Neuroeconomics has its skeptics. Richard Thaler of the Universityof Chicago, a leading behavioral economist, argues that it has yetto produce a major, surprising finding. He says he prefers to leavebrain research to the neuroscientists. But he adds: "I am a big

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