There’s an article in the New Yorker this week about neuroeconomics, by John Cassidy, their Annals of Economics writer. It’s a little like the Tuesday Science section of the Times in its focus on great new discoveries in psychology. I can’t do justice to it in a short entry, but here are some of the insights that arise from doing PET scans of your brain as you make decisions (and I quote):
“If emotional responses often trump reason, there can be no presumption that people act in their own best interest.” (You always presumed that people act in their own interest, of course, even suicide bombers, didn’t you?)
Neuroeconomics is (according to Laibson) “just a recognition that decision-making is not always perfect. People try to do the best they can, but they sometimes make mistakes.” (Hmm…, interesting…)
“The modified theories to which Laibson referred assume that people have two warring sides: the first deliberative and forward-looking, the second impulsive and myopic. Under certain circumstances, the impulsive side prevails …” (Surely not.)
Footnote a: The trouble with some of this stuff is that it implicitly assumes that you assume that best interest means best economic interest, but everyone knows that life is more than economics. Maybe you could make a lot of money by selling your body or your soul, but there might be non-economic reasons why you may not want to do so.
Footnote b: The hard part about classical financial economics is figuring out what something is rationally worth in a world of uncertainty. All of the the last thirty years insight into that question is the imperfect theory of replication. I wish there were another more perfect way to do it, but so far there isn’t. But, since the real world is so much more complicated than the imperfect and limited economic model of it, the reasonable thing to do is to figure out what something is worth rationally, if that’s possible, and then add a fudge factor for all the things you can’t model quantitatively, like future volatility or your non-economic preferences.