Neuroeconomics Critique Part 1


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This talk looks critically at behavioural economics and neuroeconomics.

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  • Coherent goal directed behaviour requires that we cut corners otherwise we would never get to the goal. The very fact that we can recognise these biases and heuristics means that we have already transcended them. Chimpanzees do not stop to wonder if there is a better way of getting termites out of a log than poking it with a stick, which rather makes their stick poking a poor example of insightful tool use. It is only conscious subjective creatures that can marshal the environment into coherence and bring things together and keep things apart. This subjectivity is not fixed into modules but is transitory: it is a constant becoming. It is fashionable to argue that we are suffering the irrationality of bankers, financiers and capitalists. There is some truth in that but focusing on the psychology of bankers et al distracts us from examining the structural deficits that made their irrationality possible and even reasonable.
  • Yet when we ask people whether other people’s behaviour influences their own, they absolutely insist that it does not.
  • “ Herd behaviour, asset mispricing and grossly imperfect information have led us to where we are today”
  • Neural information processing related to motivational reasoning appears to be qualitatively different from reasoning in the absence of a strong emotional stake in the conclusion
  • Neural information processing related to motivational reasoning appears to be qualitatively different from reasoning in the absence of a strong emotional stake in the conclusion
  • In other words people become upset when their preferred candidate is attacked not because of some primal instinct or hot emotional problem but because of decisions already banked. Committed Democrats and Republicans have already past through the process of deciding their political beliefs and now those beliefs are attached to candidates whom they support because of those past decisions. No wonder they get upset when their preferred candidate is placed in a bad light; they have spent a long time investing in that person. Of course, politics is better when it touches us emotionally but politics is more than a marketing campaign between Pepsi and Coke (or should be).
  • Selling mortgages on was a way of displacing the probability of bad debt haunting the bank. With hindsight, of course, such behaviour also spread the risk around the financial system so that when it collapsed everyone was effected and nobody was sure who owned what bad debt….
  • So long as property prices increased faster than their debt they were laughing
  • Prior to the purchase decision, preference elicits NAcc activation, while excessive prices can elicit insula activation and MPFC deactivation. Anticipatory neural activation in these regions predicts subsequent purchasing decisions. The findings are consistent with the hypothesis that the brain frames preference as a potential benefit and price as a potential cost, and lend credence to the notion that consumer purchasing reflects an anticipatory combination of preference and price considerations.
  • Neuroeconomics Critique Part 1

    1. 1. How Has Neuroimaging Been Applied To Economics & Politics? Why Is Association Not Cause? Stuart WG Derbyshire, School of Psychology, University of Birmingham
    2. 2. There are three basic points I want to make <ul><li>Assumptions of irrationality are hasty </li></ul><ul><ul><li>Yes we use heuristics and have bias in our thinking but that is often rational </li></ul></ul><ul><li>Links to neuroscience and evolutionary psychology are often highly dubious </li></ul><ul><ul><li>Everything we do is ‘associated with’ biology but that is descriptive not explanatory </li></ul></ul><ul><li>Even if there is value in behavioural economics it is largely divorced from the real economy </li></ul><ul><ul><li>Current economic problems are structural not psychological </li></ul></ul>
    3. 3. Assuming Irrationality: The Beginning <ul><li>Stanley Milgram </li></ul><ul><ul><li>Obedience to authority </li></ul></ul><ul><li>Hannah Arendt </li></ul><ul><ul><li>The banality of evil </li></ul></ul><ul><li>Phillip Zimbardo </li></ul><ul><ul><li>Stanford prison study </li></ul></ul>This emphasis on humanity in relation to environment displaced the older laissez-faire model of man as free-willing, autonomous individual
    4. 4. Assuming Irrationality: Economics <ul><li>Nisbett and Wilson (1977) </li></ul><ul><ul><li>Telling more than we can know: Verbal reports on mental processes </li></ul></ul><ul><ul><li>They reported an experiment involving a mall, a trestle table and six pairs of identical socks </li></ul></ul><ul><ul><li>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 </li></ul></ul>
    5. 5. Assuming Irrationality: Today <ul><li>“[Wall Street got wildly drunk]. And now the world must face the consequences” </li></ul><ul><li>“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” </li></ul><ul><li>“What a feeling: how emotions may yet drive the recovery” </li></ul>
    6. 6. Predictably Irrational <ul><li>The allure of free </li></ul><ul><ul><li>Free shipping at Amazon </li></ul></ul><ul><ul><li>Free monkeys and lottery tickets </li></ul></ul><ul><ul><li>Free gift certificates </li></ul></ul><ul><li>Anchoring </li></ul><ul><ul><li>Minimum credit card payments </li></ul></ul>Stewart N. Psych Sci 2009;20:39
    7. 7. Finding Rationality <ul><li>Assumptions of irrationality often lack imagination </li></ul><ul><li>To understand behaviour we must take into account the totality of the person </li></ul><ul><ul><li>Ultimatum game </li></ul></ul>
    8. 8. Ultimatum Game Across Cultures <ul><li>The general assumption is that economic reasoning is dictated by universal principles of neuropsychology </li></ul><ul><li>In the West, offers below a 60:40 split are typically rejected </li></ul><ul><li>But in the Peruvian Amazon, offers of 75:25 and lower are typically accepted </li></ul><ul><li>“ 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” </li></ul>Henrich J. American Economic Review 2000;90:973
    9. 9. Finding Rationality <ul><li>Assumptions of irrationality often lack imagination </li></ul><ul><li>To understand behaviour we must take into account the totality of the person </li></ul><ul><ul><li>Ultimatum game </li></ul></ul><ul><ul><ul><li>‘Fairness’ is not fixed in time and space but is culturally bound and contingent </li></ul></ul></ul>
    10. 10. 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
    11. 11. The Damage
    12. 12. 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
    13. 13. 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
    14. 14. Poor, Poor Phineas <ul><li>Harlow recounts that after his dismissal, Gage asked for his job back but he was turned down </li></ul><ul><li>Gage then joined a circus sideshow </li></ul><ul><li>Gage took a job in a stable for 18 months and then left for S. America to establish a line of coaches at Valparaiso </li></ul><ul><ul><li>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 </li></ul></ul>
    15. 15. 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)
    16. 16. Phineas Gage Reconsidered <ul><li>Aged 25, in good health, jovial and popular </li></ul><ul><li>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 </li></ul><ul><li>His workmates stare or avoid his gaze and if he had a girlfriend well… </li></ul>Kotowicz Z. The Strange Case of Phineas Gage. History of the Human Sciences 2007; 20 : 115-131
    17. 17. Phineas Gage Reconsidered <ul><li>How would you cope? </li></ul><ul><ul><li>Might you curse and be ill tempered? </li></ul></ul><ul><ul><li>Might you “not be yourself”? </li></ul></ul><ul><li>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 </li></ul>
    18. 18. Functional neuroimaging necessarily takes a snapshot of the person <ul><li>It is simply not possible to see the person ‘in totality’ through a scanner </li></ul><ul><li>fMRI and other techniques offer a means to describe what the brain does during a specific task </li></ul><ul><li>That doesn’t explain the person and it doesn’t even explain the task… </li></ul>
    19. 19. The Ultimatum Game <ul><li>Unfair offers activate ‘emotional’ (insula) and ‘rational’ (DLPFC) parts of the brain </li></ul><ul><li>Greater ‘emotional’ activity predicts the offer will be rejected (‘screw you buddy’) </li></ul><ul><li>Greater ‘rational’ activity predicts the offer will be accepted (‘hey, free money’) </li></ul>
    20. 20. Problems <ul><li>Tends to ossify and reify ‘fairness’ as an innate function dependent on fixed neural circuits </li></ul><ul><li>There is nothing surprising that an unfair offer causes an emotional reaction alongside reasoning </li></ul><ul><ul><li>If these things did not happen to what extent would the offer be considered ‘unfair’? </li></ul></ul>
    21. 21. Description is not explanation <ul><li>Brain activation does not provide an explanation only a new level of description for what we already know is happening </li></ul><ul><ul><li>Imaging experts get around the lack of explanation by using phrases such as ‘associated with’ or ‘involved in’ </li></ul></ul>
    22. 22. Another Example: Westen (2006) <ul><li>15 Democrats and 15 Republicans read a series of statements from Bush and Kerry with deliberately contradictory material followed by an exculpatory statement </li></ul><ul><li>Democrats rated the contradiction as larger for Bush than for Kerry and Republicans rated exactly the inverse </li></ul>
    23. 23. Another Example: Westen (2006) <ul><li>When the contradiction created conflict between data and desire there was activation of the ACC & medial PFC </li></ul><ul><li>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 </li></ul>
    24. 24. So what? <ul><li>Westen argues that the activation of these responses, or brain networks, or frames, predicts voting behaviour </li></ul><ul><li>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’ </li></ul>
    25. 25. That conclusion reaches beyond the data <ul><li>At most, Westen provides good evidence that people think differently about their preferred presidential candidate compared to the opposing candidate </li></ul><ul><li>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 </li></ul>
    26. 26. People become attached to decisions already made <ul><li>When making an argument there is the tendency to believe that argument more </li></ul><ul><li>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?) </li></ul><ul><li>But rational or irrational, emotional attachment is driven by personal history and decisions already made not by neural circuitry per se </li></ul>
    27. 27. These boots were made for walking so… <ul><li>It might be obvious that having a brain enables us to think be emotional and so forth </li></ul><ul><li>It might be equally obvious that having legs enables us to walk and run </li></ul><ul><li>But we walk or run to get somewhere not because we have legs… </li></ul><ul><li>And not having legs doesn’t necessarily stop us getting places </li></ul>
    28. 28. Finally, I mention this just in passing, none of this explains economics <ul><li>Beginning in the 1970s there was increasing disillusion with the ‘rational economic man’ view </li></ul><ul><li>The Journal of Economic Psychology was launched in 1981 </li></ul><ul><li>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 </li></ul><ul><li>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’ </li></ul>
    29. 29. It is fashionable, but wrong, to blame the current crisis on the ‘behaviour of people’ <ul><li>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 </li></ul><ul><li>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. </li></ul><ul><li>Except ‘securitisation’ of mortgages began in the 1980s as a way of managing risk </li></ul>
    30. 30. And it was not all irrational <ul><li>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 </li></ul><ul><li>Shareholders would have punished banks that failed to take advantage of low interest rates and a runaway property market </li></ul><ul><li>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 </li></ul>
    31. 31. Capitalism is a spontaneous system and is inherently irrational <ul><li>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 </li></ul>
    32. 32. More fundamentally <ul><li>Progress is defined by supplanting human labour [L] with technological means of production [M] </li></ul><ul><li>Under capitalism, the expansion of M relative to L is only secured through the constant generation of surplus L (profit) </li></ul><ul><li>But that is a limited and contradictory process… Crises are inevitable </li></ul>
    33. 33. Conclusions <ul><li>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 </li></ul><ul><li>Economics in the 1970s began a shift away from theories based on rational economic man </li></ul>
    34. 34. Conclusions <ul><li>Assumptions of irrationality have now dovetailed with functional imaging and a narrow neurodeterminism to create behavioural and neuroeconomics </li></ul><ul><li>But the assumptions are hasty and imaging is only descriptive </li></ul><ul><li>None of this helps us to understand the causes of economic crises </li></ul>
    35. 35. Neural Predictors of Purchases Knutson et al., Neuron 2007;53:147