Decisions & the Brain.
Neuroeconomics
CCN Lecture
Matteo Colombo
11 February 2010
Structure of the Lecture
 Neuroeconomics.
What is it and what’s its aim?
 Using economics to do neuroscience
 Using neuroscience to do economics
 Public Goods. A Case study.
 Game Time…
 “Giving-choice” Motives and Rationality
Neuroeconomics. What is it?
“… an interdisciplinary research program with the
goal of building a biological model of decision
making in economic environments.
Neuroeconomists ask: ‘how does the embodied
brain enable the mind (or groups of minds) to
make economic decisions?’ ... Neuroeconomics
allows us to better understand both the wide
range of heterogeneity in human behavior, and
the role of institutions as ordered extensions of
our minds”
Kevin McCabe (Economist)
One Goal Two Perspectives
 “The goal of neuroeconomics is an algorithmic
description of the human mechanism for
choice.” Paul Glimcher (Neuroscientist)
 Combines experimental techniques from
neuroscience, psychology,
and experimental economics
(e.g., electrophysiology, FMRI,
eye-tracking, behavioural studies)
and models from computational
neuroscience and economics.
Some Questions of Neuroeconomics
 What are the computational processes that the
brain uses to make economic decisions?
 What is the neural basis of these processes?
 How (and where) are value and probability
combined in the brain to provide a utility
signal?
 How do emotion and cognition interact to
shape decisions?
 What are the mechanisms of social decisionmaking?
 ...
Using Economics to do Neuroscience.
Why?
(Shizgal & Conover (1996); Shadlen & Newsome (2001);Glimcher
(2003))
 A unified theoretical framework for understanding human
behaviour – behaviour can be interpreted as choosing
alternatives with the goal of maximizing utility.
 Normativity: Precise Definition of Optimal Performance \
Analytically tractable
 Simpler evolutionarily conserved mechanisms might
prove to be closer to optimal.
 Generation of precise, testable predictions about the
system’s behavior.
 A benchmark against which to compare actual behavior.
Systematic deviations from optimality can generate new
insights into underlying mechanisms.
Expected Utility Theory. In a Nutshell
 Given some restriction on the preferences of a decisionmaker in a risk situation, it exists a function U that
represents the preferences of a decision-maker S in a
situation of risk or uncertainty, such that if S prefers A to
B, then U(A)>U(B) and if S is indifferent to A and B, then
U(A) = U(B).
A function of utility u also exists, such that if the outcome x
of a prospect is preferred to the outcome y, then u(x) >
u(y) or, in the case of indifference, u(x) = u(y).
Given U and u, and given a prospect A which pays x with
probability p, and y with probability (1 – p), then:
…
 In general utility is computed as the
product of the value and the probability
of each potential outcome
 Two components: Value and Probability
Neural Basis of Utility Signal
 Interaction between value and probability in
the computation of utility and the execution of
decision-making behavior.
 An Example
Neural Bases of EU (Knutson et al 2005)
Shape
(circle or square):
valence;
Vertical line
(left, middle, right):
magnitude
Horizontal line
(high, middle, low):
probability
Results
 The subcortical nucleus accumbens (NAcc)
activated proportional to anticipated gain
“magnitude”.
 The cortical mesial prefrontal cortex (MPFC)
activated according to anticipated gain
probability.
In sum
 For some choice domains (vision, food, sex,
safety), evolution has had a long time to sculpt
pan-species mechanisms that are crucial for
survival.
 Mechanisms that implement rational choice
(utility-maximization and Bayesian integration
of information).
 Economic models as tools to test and develop
algorithmic models of the neural hardware for
choice.
Using the Brain to do Economics
 Neoclassical econ models (like SEU) do not
provide a satisfactory description of human
behavior…
 Bounded Rationality & The rise of “Behavioural”
Economics.
 Human behaviour is not the product of a single
process, but rather reflects the interaction of
different specialized systems.
 Dual Process Models.
Two ways
Economists can use the Brain
I) “Evidence which support the kinds of variables
and parameters introduced in behavioral
economics.”
II) “Evidence which suggest the influence of “new”
variables that are implicit, underweighed, or
missing in rational-choice theory.” Colin Camerer
 Test and develop alternatives to
neoclassical/revealed preference theories
Public Goods. A Case Study
Commodities that can’t be provided without
everybody being able to consume them.
Eg: National defense, Clean Air, Public Fireworks,
Street Lights, Knowledge, ...
 The fact that one person benefits from these
things does not diminish their value to other
people,
 and people can’t be prevented from enjoying
the benefits these goods produce.
Public Goods Games.
The free rider problem
If people can choose whether or not to buy a ticket
when riding on trains, will enough people pay to
cover the cost of running the system?
Public goods (PG) games are used to study social
dilemmas that arise when the welfare of a group
conflicts with the narrow self-interest of each
individual group member.
Each player has the private incentive to contribute
nothing, and the unique subgame perfect Nash
Equilibrium occurs when each subject contributes
zero to the group account.
…Game Time
Why paying taxes?
Two Possible Motives
 Satisfaction from increases in a public good,
such as the provision of basic services to the
needy. “Pure Altruism”
 Sense of agency associated with the act of
voluntary giving. “Warm Glow”
 Neural evidence may help clarify the relative
importance of pure altruism and warm-glow
motives for giving-decisions.
Predictions
 A person only gets warm-glow benefits if she
makes an active decision to give, while a
purely altruistic motive should be satisfied
even by passively observing an increase in the
public good which is paid for by someone else.
 Harbaugh et al (2007)
Upshot
Harbaugh et al (2007)
 “Consistent with pure altruism, we find that
even mandatory, tax-like transfers to a charity
elicit neural activity in areas linked to reward
processing.”
 neural responses to the charity's financial gains
predict voluntary giving.
 However, consistent with warm glow, neural
activity further increases when people make
transfers voluntarily.
 Both pure altruism and warm-glow motives
appear to determine the hedonic consequences
of financial transfers to the public good.
In Sum
 Evidence supports existence of a purely
altruistic motive for charitable giving.
 In large societies this motive may lose its
force, and could not explain the widespread
giving that we observe.
 The combination of Pure Altruism and warmglow known as Impure Altruism may be an
appealing alternative model.