What is Neuroeconomics?

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Read this lesson to learn how economists are now including emotions when analyzing economic situations and people's reactions to them. You'll see that the emotional response can sometimes be different from the expected economic response.

When people make decisions about money, rational and logical thinking are not always fully utilized. However, many economic models are based on people doing just that. As a response, interest in the multi-discipline field of neuroeconomics has increased. 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 scientific disciplines: neuroscience, psychology, and economics.

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.

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What is Neuroeconomics? - Definition & Examples