This Is Your Brain on Money

Neuroeconomics may reveal the building blocks of smart shopping.

COLIN F. CAMERER

Nothing is so rare as intelligence. But while economics is the study of scarce resources, thinking itself has never been examined by economists. The reason they neglected brain function goes back to the roots of modern economic thought. Since the 1920s, economists have considered their field to be a system of mathematical equations: a physics of social and economic life. To derive mathematical theorems about the behavior of systems like the worldwide coffee market, it is necessary to make the behavior of individuals inside that market mathematically simple. Economic theory does this by assuming that people know what they like; that they are consistent; that they don�t care what other people are buying; and that, given their incomes, they choose the goods they like most. Economists call this “utility maximization” or “rational choice.”

The utility-maximization model has proved useful for simple problems, like predicting what happens to the demand for gas if it is taxed. If people don�t care what others are buying, their individual utilities, or how much they want for what they will pay, can be added up into a demand curve showing how sensitive the market is to price increases. If demand is consistent over time, then consumer response to price change can be computed statistically and used to forecast the response to a specific anticipated tax change. These forecasts are usually accurate.

But as the physicist Murray Gell-Mann, Ph.D., once said, “Think how hard physics would be if particles could think.” Economics is about particles that can think—as well as emote, plan, and talk. Because human behavior is more complex than rational-choice theory would allow, economic theory often fails to explain very much at all. Now a new approach, called neuroeconomics, seeks to make economics a better guide to real human behavior by introducing the dismal science to what is known about the brain. It also hopes to import economic principles into the neurosciences, thereby rescuing neuroscience from some of its own troubles.

Paul Glimcher�s Decisions, Uncertainty, and the Brain: The Science of Neuroeconomics explains the promise of these ideas.