Neuroeconomics Critique Part 1

How Has Neuroimaging Been Applied To Economics & Politics? Why Is Association Not Cause? Stuart WG Derbyshire, School of Psychology, University of Birmingham

There are three basic points I want to make
Assumptions of irrationality are hasty
Yes we use heuristics and have bias in our thinking but that is often rational
Links to neuroscience and evolutionary psychology are often highly dubious
Everything we do is ‘associated with’ biology but that is descriptive not explanatory
Even if there is value in behavioural economics it is largely divorced from the real economy
Current economic problems are structural not psychological

Assuming Irrationality: The Beginning
Stanley Milgram
Obedience to authority
Hannah Arendt
The banality of evil
Phillip Zimbardo
Stanford prison study
This emphasis on humanity in relation to environment displaced the older laissez-faire model of man as free-willing, autonomous individual

Assuming Irrationality: Economics
Nisbett and Wilson (1977)
Telling more than we can know: Verbal reports on mental processes
They reported an experiment involving a mall, a trestle table and six pairs of identical socks
The ‘best’ socks were consistently on the right hand side of the table. When asked why that pair, people pointed to the higher quality of the material, better feel and colour and so forth

Assuming Irrationality: Today
“[Wall Street got wildly drunk]. And now the world must face the consequences”
“Emotion, it can be argued, not only helped to lead America into the current economic crisis but may also be helping to keep it there”
“What a feeling: how emotions may yet drive the recovery”

Predictably Irrational
The allure of free
Free shipping at Amazon
Free monkeys and lottery tickets
Free gift certificates
Anchoring
Minimum credit card payments
Stewart N. Psych Sci 2009;20:39

Finding Rationality
Assumptions of irrationality often lack imagination
To understand behaviour we must take into account the totality of the person
Ultimatum game

Ultimatum Game Across Cultures
The general assumption is that economic reasoning is dictated by universal principles of neuropsychology
In the West, offers below a 60:40 split are typically rejected
But in the Peruvian Amazon, offers of 75:25 and lower are typically accepted
“ Rather than viewing themselves as being “screwed” by the proposer, they seemed to feel it was just bad luck that they were responders and not proposers”
Henrich J. American Economic Review 2000;90:973

Finding Rationality
Assumptions of irrationality often lack imagination
To understand behaviour we must take into account the totality of the person
Ultimatum game
‘Fairness’ is not fixed in time and space but is culturally bound and contingent

At the same time, individuals chart their own course: The case of Phineas Gage “ Gage was working as the foreman for a railroad construction team in Vermont in 1848, when an explosion blew an iron bar through his left cheek, skull and the front of his brain. The bar exited the top of his head a high speed, and Gage managed to survive the blast”. Houser et al., Games & Economic Behavior 2005;52:373

The Damage

At the same time, individuals chart their own course: The case of Phineas Gage “ Although his post-accident IQ remained high according to standard measures, he nevertheless underwent radical personality changes and, perhaps more interestingly, seemed to lose the ability to make good decisions. In particular, he systematically made decisions that were, by any objective measure, not in his long-run best interest. He eventually lost his job and his family, and spent much of the rest of his life working as a sideshow attraction for a circus”. Houser et al., Games & Economic Behavior 2005;52:373

According to Damasio and Harlow Prior to his injury Gage was described as “efficient”, “capable” with “temperate habits” and “considerable energy of character”. After the accident Gage remained intelligible, able to converse and respond rationally but his character was altered, he was now “fitful, irreverent, indulging at times in the grossest profanity which was not previously his custom, manifesting but little deference for his fellows, impatient of restraint or advice when it conflicts with his desires, at times pertinaciously obstinate, yet capricious and vacillating, devising many plans of future operation, which are no sooner arranged than they are abandoned… always finding something which did not suit him.” Quoted from John Harlow. Gage died in 1861 Source: Damasio AR. Descartes Error 1994

Poor, Poor Phineas
Harlow recounts that after his dismissal, Gage asked for his job back but he was turned down
Gage then joined a circus sideshow
Gage took a job in a stable for 18 months and then left for S. America to establish a line of coaches at Valparaiso
He was ‘occupied in caring for horses, and often driving a coach heavily laden and drawn by six horses’ (Harlow, 1868). This means he had strength, dexterity and an excellent relationship with the animals

What Did Phineas Look Like? The left side of the face is wider than the right side, the left malar bone being more prominent than its fellow. There is a linear cicatrix near the angle of the lower jaw, an inch in length. Ptosis of the left eyelid; the globe considerably more prominent than its fellow, but not as large as when I last saw him. Can adduct and press the globe, but cannot move it in other directions; vision lost. A linear cicatrix, length two and one-half inches, from the nasal protuberance to the anterior edge of the raised fragment of the frontal bone, is quite unsightly. […] Partial paralysis of left side of face. (Harlow, 1868)

Phineas Gage Reconsidered
Aged 25, in good health, jovial and popular
Bang, half his face is mangled, and where there was once a left eye there is now a useless immobile eyeball protruding from the socket, a lifeless eyelid hanging over it
His workmates stare or avoid his gaze and if he had a girlfriend well…
Kotowicz Z. The Strange Case of Phineas Gage. History of the Human Sciences 2007; 20 : 115-131

Phineas Gage Reconsidered
How would you cope?
Might you curse and be ill tempered?
Might you “not be yourself”?
Harlow does not report a single act that Gage should have been ashamed of. There is no mention of violence, theft, abuse; not even something as vague as ‘irresponsibility’. There is coherence and dignity in the way Gage dealt with his predicament, he deserves deep respect

Functional neuroimaging necessarily takes a snapshot of the person
It is simply not possible to see the person ‘in totality’ through a scanner
fMRI and other techniques offer a means to describe what the brain does during a specific task
That doesn’t explain the person and it doesn’t even explain the task…

The Ultimatum Game
Unfair offers activate ‘emotional’ (insula) and ‘rational’ (DLPFC) parts of the brain
Greater ‘emotional’ activity predicts the offer will be rejected (‘screw you buddy’)
Greater ‘rational’ activity predicts the offer will be accepted (‘hey, free money’)

Problems
Tends to ossify and reify ‘fairness’ as an innate function dependent on fixed neural circuits
There is nothing surprising that an unfair offer causes an emotional reaction alongside reasoning
If these things did not happen to what extent would the offer be considered ‘unfair’?

Description is not explanation
Brain activation does not provide an explanation only a new level of description for what we already know is happening
Imaging experts get around the lack of explanation by using phrases such as ‘associated with’ or ‘involved in’

Another Example: Westen (2006)
15 Democrats and 15 Republicans read a series of statements from Bush and Kerry with deliberately contradictory material followed by an exculpatory statement
Democrats rated the contradiction as larger for Bush than for Kerry and Republicans rated exactly the inverse

Another Example: Westen (2006)
When the contradiction created conflict between data and desire there was activation of the ACC & medial PFC
Westen interpreted this finding to indicate that partisans are threatened when faced with negative information about their own candidate, but not when presented with negative information about the opposing candidate

So what?
Westen argues that the activation of these responses, or brain networks, or frames, predicts voting behaviour
People do not so much reason as feel their way towards a position: ‘The data from political science are crystal clear: people vote for the candidate who elicits the right feelings, not the candidate who presents the best arguments’

That conclusion reaches beyond the data
At most, Westen provides good evidence that people think differently about their preferred presidential candidate compared to the opposing candidate
Perhaps people become concerned, anxious or emotional when their preferred candidate is shown in a bad light, but not when the opposing candidate is shown in a bad light

People become attached to decisions already made
When making an argument there is the tendency to believe that argument more
Again this can be seen as rational (why make an argument you don’t believe?) or irrational (why believe an argument just because you are making it?)
But rational or irrational, emotional attachment is driven by personal history and decisions already made not by neural circuitry per se

These boots were made for walking so…
It might be obvious that having a brain enables us to think be emotional and so forth
It might be equally obvious that having legs enables us to walk and run
But we walk or run to get somewhere not because we have legs…
And not having legs doesn’t necessarily stop us getting places

Finally, I mention this just in passing, none of this explains economics
Beginning in the 1970s there was increasing disillusion with the ‘rational economic man’ view
The Journal of Economic Psychology was launched in 1981
In the first article van Raaij explained that the aim of the journal was to encourage people away from studying the laws of interest rates, inflation, unemployment and so forth
Instead, the new journal would support studies of ‘the behaviour of people who set the prices and whose actions bring about the higher or lower interest rates, inflation rates, or unemployment’

It is fashionable, but wrong, to blame the current crisis on the ‘behaviour of people’
Even if consumers and bankers are taught to watch out for the effects of anchoring, the lure of free and the need for equitable exchanges it is hard to see how that will do anything to improve the productive base of any economy
Apparently, the current economic crisis is down to greedy bankers handing out debt to people with little ability to pay, taking commissions and bundling that debt up before passing it along to the next banker who could wring some money out of it, and so on. Until it all collapsed.
Except ‘securitisation’ of mortgages began in the 1980s as a way of managing risk

And it was not all irrational
In his new book, snappily titled: “A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression” Richard Posner explains that there was nothing irrational about bankers making money off financial instruments
Shareholders would have punished banks that failed to take advantage of low interest rates and a runaway property market
Consumers acted rationally in accepting mortgages they could not pay given the increasing value of property and the apparent low risk of a burst bubble

Capitalism is a spontaneous system and is inherently irrational
The separation of the economic process into two phases – production and exchange – creates the possibility of crises, since there can be no guarantee that production will be followed by sale

More fundamentally
Progress is defined by supplanting human labour [L] with technological means of production [M]
Under capitalism, the expansion of M relative to L is only secured through the constant generation of surplus L (profit)
But that is a limited and contradictory process… Crises are inevitable

Conclusions
Psychology in the 1960s began a shift from trying to understand humans as rational agents towards a view of humans as bound by forces beyond rationality
Economics in the 1970s began a shift away from theories based on rational economic man

Conclusions
Assumptions of irrationality have now dovetailed with functional imaging and a narrow neurodeterminism to create behavioural and neuroeconomics
But the assumptions are hasty and imaging is only descriptive
None of this helps us to understand the causes of economic crises

Neural Predictors of Purchases Knutson et al., Neuron 2007;53:147

Neuroeconomics Critique Part 1

by sderbysh1 on Jul 28, 2009

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