Merging the Sciences
This field of study is actually quite interesting because it adds an extra layer of complexity to actions. Instead of saying that economics is driven purely by logic and rational thought as most traditional economic models did, neuroeconomics proposes that your actions are also driven by emotions and brain chemistry.
As knowledge of the human brain has increased and the instruments used to study it have become more sophisticated, it has become possible to monitor brain activity in a variety of situations. In order to measure the changes in brain activity during an economic negotiation or transaction, an active MRI is connected to a participant while the participant is asked a series of economics questions. Let's look into this a bit further.
Economic Actions
One famous example of neuroeconomics versus logical economics is what is known as the ultimatum game. This game has two players; one player has a sum of money and has to split it with the other player. The player with the money offers the other a split of the sum, and it is then up to the other player to accept or reject the offer. If the offer is rejected, nobody gets any money.
According to traditional logical economics, the player being offered a split will take it 100 percent of the time as long as the split gives them an amount of money greater than 0. This means that it doesn't matter how small the split is for the player, they will always accept even if it is a small sum of money.
So, this should seem pretty reasonable; if someone is offering you money, you take it no matter how small the sum. But, that's not what happened when the ultimatum game was played. Many people had no problem refusing the offer when they felt the split was unfair. It would be the rational choice to accept an unfair split so long as it's more then zero, but an emotional response may result in zero for both parties.
Emotional Actions
When an emotional response becomes part of a negotiation, we are now dealing with neuroeconomics. After hooking up the player that accepts or rejects the offer with an active MRI, researchers found that when the player rejects a small offer, the part of the brain that is most active is the part that helps us decide whether to punish or reward. So now instead of making a logical action, the player makes an emotional one based on their perception of fairness.
Neuroeconomics in Advertising
Let's look at another example.
Think about what happens when people are exposed to advertising. Think about the times that you've watched commercials on television, and were persuaded to pursue a product being advertised. Have you ever wondered why you followed through on those commercials? The rational mind says that if you don't need it, you won't buy it, but commercials are geared to effect your emotions. So, did you follow through on the commercial because you wanted to feel that same sense of happiness as the customers in the commercial for those yummy looking hamburgers did? If so, your purchasing decision wasn't so much rational as emotional.
Lesson Summary
Neuroeconomics refers to the study of how and why people choose the actions that they do when it comes to economics. This study actually involves three different disciplines: neuroscience, psychology, and economics. Rational economics says that people will do things that make logical sense for the person's financial benefit. Neuroeconomics, on the other hand, says people will do things out of emotional logic at certain times and during those times, the emotions can overpower the logical side.
