The Neuroscience of Decision-Making

Neuroeconomics, as the name implies, bridges the fields of neuroscience and economics to help further our understanding of decision-making. While some fields of economic thought treat humans as rational agents, concepts in social psychology and neuroeconomics have offered a competing view. Tools used to study the brain can be used to explore how humans react when faced with a decision, giving researchers an opportunity to determine which decisions are made where, and what biological factors can influence these decisions (hormones, drugs, conditioning, lesions, etc.).

Daniel Kahneman, who famously won the Nobel Prize in Economics for describing Prospect Theory (how actual people respond to risk and the tendency to avoid losses), is a largely influential figure in our understanding of decision-making. As described in his book, “Thinking Fast and Slow,” people generally tend to use heuristics in problem-solving, not spending time to parse through a problem, opting to use more “primitive” circuits of decision making (2011). These are referred to as ‘System 1,’ or the faster ‘Automatic system,’ which relies on intuition and emotion, and ‘System 2,’ or the ‘Effortful system,’ which relies on logic (hence the title of the book). We employ these systems when we make decisions every day, however one example used in the book illustrates this idea as follows:

“A bat and ball cost $1.10.

The bat costs one dollar more than the ball.

How much does the ball cost?”

Intuitively, someone would quickly say that the ball costs 10 cents, unless they took the time to work out the problem, or (more likely) already heard this problem before. If the ball did cost 10 cents, the total cost of the bat (which would consequently cost $1.10) and ball would be $1.20 (for the total to match, the ball would actually have to cost 5 cents). As you can see, riddles or similarly cryptic word problems tend to showcase this phenomenon well. It is important to note that this doesn’t serve as an indictment of intuition, which is integral to our ability to process a large part of the human experience (beauty, art, etc.), but simply observes how humans act, an alternative to treating people as purely rational agents (which they often aren’t).

Nassim Taleb is another influential figure in decision-making. His book, ‘Fooled by Randomness,’ describes the tendency of people to seek and find patterns where none really exist, such as in the stock market where an analysis of charts and equations feed our desire to find patterns and logic in an otherwise random set of data where no such patterns might exist (2005). To paraphrase, as Taleb puts it, traders attribute their successes to the analysis of chart patterns instead of the real culprit, chance.

Neuroscientists primarily use imaging techniques like fMRI to measure brain activity when performing certain tasks, such as having subjects evaluate risk and reward. To determine which brain areas are active during these activities, researchers use the subtraction method, which simply involves subtracting the brain activity during a control or baseline state, from brain activity during a task.

A review paper by Camerer et al. (2004), which compiled the state of neuroeconomics at the time, summarized a number of important papers in the field of decision-making with neuroanatomical relevance, which will be discussed from here forward. 

People seem to be very poor at gauging risk, whether it be the safety of flying versus driving (the latter which is statistically more dangerous), or the threat of gun violence and similar threats to one’s life. Fear, encoded within the amygdala and suppressed by the frontal cortex, drives much of our ability to understand risk. Gambling fallacies, which gauge our ability to understand basic probabilities, are another clear example of this. Interestingly, they highlighted a study by Moreyra et al. (2000), which found that “treatment with naltrexone, a drug that blocks the operation of opiate receptors in the brain, reduces the urge to gamble.” 

Neuroeconomics offers researchers the ability to understand the biological factors and cognitive biases at play when people make decisions. Understanding how humans operate in response to risk and reward has been able to inform economic thought and provides an interesting insight into how these behaviours can be influenced by innate circuitry, drugs, and brain structures.