Neuroeconomics Essay

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In 2008, students  at 31 New York City high schools were offered up to $1,000 for scoring well on Advanced Placement  (AP) exams. The good news is that  the number of AP exams taken rose from 4,275 in 2007 to 4,620, an increase of 345. In addition, a greater number of 5s (the highest score) were posted. On the other hand, the overall number of students who passed the AP exams declined slightly, from 1,481 to 1,476.

By contrast,  in Tucson,  Arizona,  School Superintendent Vicki Balentine announced  results of the first year of a three-year plan to give 75 sophomores $100 per month  for maintaining  perfect attendance and  at least a C minus  average. Those offered the money  seemed  to  show  up  more  for  classes and school activities than a control  group that received no cash reward.

Why, despite  a significant economic  reward,  did students  perform  slightly worse on the  AP tests  in New York? Why does the Tucson experiment  appear to be yielding better results? Those are questions that the new field of neuroeconomics seeks to answer.

Neuroeconomics is the study of what happens when people  make  decisions  about  money,  such  as  why people save, buy stocks, steal, and overspend. As Colin Camerer, George Lowenstein and Drazen Prelec note, in spite of years of a significant volume of research data, economists  lack a reliable theory  that  explains “why stock  prices  fluctuate,  why people  trade,  and why there are so many actively managed mutual funds despite poor fund performance.” These and other authors argue that one fruitful area for discovering the reasons for people’s economic decision making is neuroscience. It is possible that the brain mechanisms that underlie the psychological processes of attention  and perception have direct application to economics.

Neuroeconomics is a branch of the field of “behavioral economics.” Behavioral economics uses research from such social sciences as anthropology,  psychology, sociology, and biology to demonstrate how factors in these fields influence economic behavior. Neuroeconomics expands behavioral economics by using facts about brain activity.

Neuroeconomics examines  specific elements  of choice in decision making. These elements  include risk, wishful thinking, ambiguity, expectation,  time preference,  and  learning.  In  addition  to  exploring these elements  of choice, neuroeconomics seeks to discover the neural  correlates  of those elements  of choice.  By examining  those  relationships  between brain functioning  and decision making, neuroeconomists can better  understand sound financial judgments as well as what processes might impair those judgments.

Neuroeconomists  are  challenging  standard   economic assumptions  that  decision making is a simple matter of integrated and coherent utility maximization. Peter Politser argues, however, that despite the promise of neuroeconomics for understanding economics decision making, the field currently suffers from inconsistent and contradictory findings across studies. Part of the reason for the lack of clarity in these findings is that because neuroeconomics is a new field, it lacks clear methodological  guidelines for studying and interpreting neuroeconomic phenomena.

Recent developments  bode  well for seeing those guidelines develop. For example, George Mason University hosts the Center  for the Study of Neuroeconomics  (CSN). CSN is a research  center  and  laboratory  dedicated  to “the experimental  study of how emergent  mental computations in the brain interact with  the  emergent  computations of institutions   to produce  legal, political,  and  economic  order.”  The Camerer  Lab at the California Institute  of Technology is also doing  significant research  in neuroeconomics. In addition,  the first handbook  of the field, Neuroeconomics: Decision Making and the Brain, was recently published in association with the Society for Neuroeconomics.

In the meantime, Whitney Tilson, who helped create  the  New York City incentive  program,  expects improvement  in  2009,  and  hoped  more  students would  sign up  as word  spread  about  the  financial incentive to take AP tests. Program organizers noted the  cash  incentive  program  would  be  tweaked  for next year; the rewards for 4s and 3s would most likely be lowered to $500 and $250 (scores of 5 will still net $1,000), a move that  most  neuroeconomists  would likely approve.


  1. Camerer, G. Lowenstein, and D. Prelec, “Neuroeconomics: How Neuroscience Can  Inform  Economics,” Journal of Economic Literature (v.XLIII, 2005);
  2. Glimcher, C. Camerer, E. Fehr, and R. Poldrack, Neuroeconomics: Decision Making and the Brain (Elsevier Academic Press, 2008);
  3. Gootman, “Mixed Results on Paying City Students to Pass Tests,” New York Times (August 19, 2008);
  4. Loewenstein, S. Rick, and J. D. Cohen, “Neuroeconomics,” Annual Review of Psychology (v.59, 2008);
  5. Lynn Nadel, ed., Encyclopedia of Cognitive Science (Macmillan, 2003);
  6. Politser, Neuroeconomics: A Guide to the New Science of Making Choices (Oxford University Press, 2008).

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