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1. Armin Falk and Bernd Weber Universitt Bonn, SS 08
Neuroeconomics Part I: Introduction
2. Overview
Introduction
Methods
Neuroanatomy - macro- and microanatomy of the human brain
Visit the Institute of Anatomy
Neurophysiology - how neurons communicate
Methods of cognitive neuroscience (EEG, fMRI, PET,
MEG....)
Visit Life&Brain - NeuroCognition Lab
Important neuroeconomics papers (see below)
3. Papers (to be completed)
The Neural Basis of Economic Decision-Making in the Ultimatum
Game Alan G. Sanfey, James K. Rilling,Jessica A. Aronson, Leigh E.
Nystrom, Jonathan D. Cohen, Science 13 June 2003, vol. 300. no.
5626, pp. 1755 - 1758
Getting to Know You: Reputation and Trust in a Two-Person
Economic Exchange, Brooks King-Casas, Damin Tomlin, Cedric Anen,
Colin F. Camerer, Steven R. Quartz, P. Read Montague, Science,
2005, vol. 308, pp. 78-83.
Neuroeconomics: How Neuroscience Can Inform Economics, Colin F.
Camerer, George Loewenstein, Drazen Prelec, Journal of Economic
Literature, 2005, vol. 43, 9-64.
Neuroeconomics: Why economics needs brains, Colin F. Camerer,
George Loewenstein, Drazen Prelec, Scandinavian Journal of
Economics, 2004, vol. 106, no. 3, 555-79.
Oxytocin increases Trust in Humans, Michael Kosfeld, Markus
Heinrichs, Paul Zak, Urs Fischbacher and Ernst Fehr, Nature 435, 2
June 2005, 673-676.
The Neural Basis of Altruistic Punishment, Dominique J.-F. de
Quervain, Urs Fischbacher, Valerie Treyer, Melanie Schellhammer,
Ulrich Schnyder, Alfred Buck, Ernst Fehr, Science 305, 27 August
2004, 1254-1258.
Strategizing in the Brain, Colin F. Camerer, Science, 2003,
vol. 300, pp. 1673-75.
Social Comparison Affects Reward-Related Brain Activity in the
Human Ventral Striatum, K. Fliessbach, B. Weber, P. Trautner, T.
Dohmen, U. Sunde, C. E. Elger, A. Falk, Science, 2007, Vol. 318,
Issue 5854, 1305 1308.
Unfair pay and Stress, Falk, Menrath, Kupio and Siegrist,
Discussion paper.
4. What is Neuroeconomics?
General: Neuroeconomics combines methods from neuroscience and
economics to better understand how the human brain generates
decisions in social and economic contexts
Marriage of neuroscience methods with experimental economics
methods
Definition (Laibson): Neuroeconomics is the study of the
biological microfoundations of economic cognition.
Biological microfoundations are neurochemical mechanisms, like
brain systems, neurons, genes, heart rate, skin resistance, and
neurotransmitters.
Economic cognition includes mental representations, emotions,
expectations, learning, memory, preferences, decision-making, and
behavior.
5. Neuroeconomists
About 100-200 neuroscientists and economists are actively
working in this new field.
Its roughly an even mix.
This is in contrast to behavioral economics, where its a
one-sided game (mostly economists and very few psychologists).
6. Neuroeconomics & Behavioral Economics
Behavioral economics developed alternative models of economic
behavior.
These models are black box models. They aim to predict behavior
better but there is no ambition to understand the minds internal
processes that generate the behavior.
Questions
Are components of behavioral models represented in brain
structures?
Can insights into how the brain works improve economic
modeling?
Can those insights discriminate between alternative
models?
7. Why is Neuroeconomics so fascinating?
Brain research has made great progress during the past decade,
largely due to noninvasive techniques that allow observing the
brain while it is active.
Systematic study of the relation between behavior and brain
processes in healthy human subjects is possible.
Possible to provide brain evidence for standard economic
theory, allows deeper understanding of (behavioral) economics
results
Provide genuinely new insight into the neurobiological
determinants of human behavior
and this is genuinely interesting and exciting in itself
8. What is the goal of neuroeconomics? Analogy to
organizational economics (Camerer EJ 2007)
Until 1970s theory of the firm was a radically reduced form
model of how capital and labor are combined to produce output. This
model neglects
principal-agent relations
Gift exchange
Efficiency wages
Hierarchy and authority
Communication networks
Etc
Nevertheless a useful simplification for deriving industry
supply curves and doing macroeconomics
but clearly inapproapriate for a host of interesting
questions
9. Opening the black box of the firm Contract theory
10. Opening the black box of the human brain Neuroeconomics
(See Camerer 2007)
11. Brain evidence provides a deeper understanding of
behavioral economics results
Are social preference phenomena better modelled as preferences
or as bounded rationality?
One possibility to answer this question is to examine whether
the brains reward mechanisms are activated if people make
other-regarding choices
Example: ultimatum game
12. Neural Basis of Responder Behavior in the Ultimatum Game
(A. G. Sanfey, J. K. Rilling, J. A. Aronson, L. E. Nystrom, J. D.
Cohen, Science 13 March 03)
Responders brain activations are measured by fMRI in a $10
UG.
A responder faces each of three conditions ten times.
Offers from a (supposed) human partner
Random offers from a computer partner
Money offer (there is no proposer here)
Research Questions: Which brain areas are more activated when
subjects face
fair offers (3-5) relative to unfair offers (1-2).
the offer of a human proposer relative to a random computer
offer.
Method (very simplified):
Regression of activity in every voxel (i.e, 3D Pixel) in the
brain on the treatment dummy (i.e., unfair offer dummy, human
proposer dummy)
13. Details of the Experiment
14. Differences in brain activity between unfair and fair
offers from a human proposer
What you see: Image of voxelwise t-statistic (red) is overlaid
on top of a structural brain image (gray).
Bilateral anterior insula and anterior cingulate cortex.
dorsolateral prefrontal cortex. Dorsolateral prefrontal
cortex.
15. Results
Regions showing stronger activations if subjects face unfair
human offers relative to fair human offers (the same regions also
show more activation if the unfair human offer is compared to
unfair random offers).
Enables a controlled, spatially and temporally limited,
stimulation or inhibition of brain areas.
Psychopharmacological interventions
Manipulation of neurotransmitter systems or hormone
systems.
23. Lesion studies
Naturally occurring lesions
Accident, stroke, brain tumor.
Allows to determine that a particular function is processed
independently from other functions.
Allows to determine causally that a particular region is
critical for the performance of a particular task.
Problem
It is often difficult to determine the affected brain
region
24. Results gained with lesions
Broca found an area that is critical for speech
production.
Humans with lesions of the amygdala lose affective (i.e.
emotional) meaning.
Hippocampus removal prevents experiences from being encoded in
long-term memory.
25. Phineas Gage
Explosion pushed iron up through the top of the scull.
He survived.
He was intellectually rather unaffected by the accident.
He was unable to make reasonable decisions.
26. Electro-encephalogram (EEG)
Measures electrical potentials at the scull, caused by neural
activity.
Very good temporal resolution but poor spatial resolution.
Large number of repetitions of the same situation is
necessary.
Interior brain activity is not directly recorded
Further limits:
Eye movement creates also electric activity.
In some regions neurons are not aligned and activity can cancel
out.
Not well suited for most economic experiments.
128 electrode array
27. Magnetoencephalograghy (MEG)
Rather new method, based on measuring the magnetic field
generated by neural activity.
Advantages in comparison to EEG
Signal unaffected by skull.
Good spatial resolution (2-3 mm).
Disadvantages in comparison to EEG
Cannot detect signals from deeper brain structures.
Expensive.
28. Positron Emission Tomography (PET)
A radioactive substance is injected into the blood.
This substance emits positrons.
These positrons decay, together with electrons .
PET detects the brain area where this decay occurs, i.e., it
detects the areas into which the radiation went.
Variants:
Glucose with radioactive fluorine.
Water with radioactive oxygen; measures blood volume.
Better spatial but poorer temporal resolution than EEG
Limited to short tasks
29. fMRI (Functional Magnetic Resonance Imaging)
MRI is based on the principle that protons in a magnetic field
align with the field. If the magnetic field is perturbed the
direction of the protons is disturbed. When the protons are
redirected in the magnetic field electromagnetic radiation is
emitted and is detected by the scanner.
fMRI uses the fact that hemoglobin (red blood cells) have
different magnetic properties depending on whether there is little
or much oxygen in the blood.
Increased neuronal activity in the brain uses up oxygen such
that initially the oxygen level in the activated area falls; later
on the fall in oxygen is overcompensated for when oxygen-rich blood
moves to the activated area.
Blood flow has a lagged response to neural activity.
(Hemodynamic response function HRF)
Does still allow relatively good temporal resolution because
HRF is known.
Shortest stimuli that have been detected with fMRI:
Blamire et al. (1992): 2 sec
Bandettini (1993): 0.5 sec
Savoy et al (1995): 34 msec
31. How is fMRI data analyzed (will be discussed later)
Behavioral analysis
Preprocessing
Motion correction
Normalizing
Smoothing
Statistical maps
Individual analysis: Which voxels correlate with the treatment,
corrected for the homodynamic response?
Group analysis: Which voxels do so for many people.
One has to take into account that multiple tests are conducted
(corrected and uncorrected p-values).
Time course in regions of interests (ROI-analysis).
32. Block design and event related design
Block design
A experimental condition A is repeated several times, then the
condition B is repeated several times,
Event related design
The experimental conditions A and B are presented on randomized
order.
This is in particular the case, when the timing of experimental
conditions is determined endogenously (free decision time).
Neuroeconomic experiments are usually event related, because
the stimulus should unpredictable.
33. Comparison of PET and fMRI
Advantages of fMRI:
higher spatial resolution.
higher temporal resolution.
less invasive (no radioactivity).
Advantages of PET:
Silent (auditory stimuli).
Less movement artifacts when subjects speak.
Sensitive to the whole brain. fMRI creates artifacts' in the
neighborhood of cranial cavities (Schdelhhle) (forehead, ear).
Fewer repetitions necessary.
PET almost dominated by fMRI. Latter two point are potentially
relevant for economic experiments.
34. Transcranial Magnetic Stimulation (TMS)
Allows virtual lesions
Non-invasive procedure: debated
A strong, magnetic impulse induces small currents (Strme) in
the brain (cortex).
These currents create neural activity.
Repeated stimulation at the same position can increase or
decrease how strongly neuron respond.
Temporally and spatially limited inhibition or activation of
the brain function.
35. Pharmacological Methods
Placebo controlled administration of substances inform about
the functioning of neurotransmitter or hormone systems.
Neurotransmitter
Dopamine, Serotonin, Noradrenalin
Neurohormons
Oxytocin
Sexual hormons
Testosterone, Estrogen
Stress hormons
Cortisol
36. Other methods
Single Neuron Measurement
Implantation of electrodes into the brain
While fMRI measures cumulative activity of thousands of
neurons, each electrode measures a single neurons activity
Very invasive, therefore used on humans only if neurosurgery
inevitable due to epilepsy, and on animals
Psychopathology
Various illnesses have been associated with specific brain
areas, some illnesses progress along a localized path in the
brain
Chronic mental illnesses (schizophrenia), degenerative diseases
of the nervous system (PD), developmental disorders (autism)
Inferences can be made about the role of specific brain areas
in brain functioning
37. Overview of neuroscientific methods
38. Animal research
Many brain areas in humans and animals have similar
structures.
Its possible to produce addicted rats. Addiction is created in
that part of the brain which we share with other mammals.
Learning.
Decision taking in monkeys.
Creating lesions and single cell recording (i.e. measuring the
electrical potentials of single neurons) is possible in non-human
primates but not in healthy humans.
39. Controlled lesions
Allows to determine causally whether a particular brain region
(or connection between regions) is essential for a particular
function.
Examples:
Experimental destruction of both amygdalas in an animal tames
the animal, making it sexually inactive and indifferent to danger
like snakes or other aggressive members of its own species.
Knocking out the gene that makes a key protein for amygdala
function makes rats relatively fearless.
40. Topics in Neuroeconomics: Preferences The following is
taken from the Camerer et al. paper Neuroeconomics: Why Economics
Needs Brains (Camerer, Loewenstein, Prelec, 2004, Scandinavian
Journal of Economics)
Revealed preference approach cannot tell the whole story
Al and Naucia both refrain from buying peanuts at a certain
price
Common disutility?
Al has a fatal allergy (inelastic demand) while Naucia once
simply ate too many peanuts (would be willing to eat some again for
a certain price)
Biological state-dependence vs. rational choice
There is no low enough price to induce Al buying peanuts
Tradeoff between sleep utility and risk of plowing into a tree
utility?
Dead sleeper with U(sleep)>U(plowing into tree)???
Choice as a result from interaction of multiple systems
(automatic biological system, controlled cognitive system)
41. Preferences
Preferences are state-dependent
Whether I like having icecreme depends on the season
Contradictory to standard analysis of welfare, which assumes
that choices anticipate experience perfectly
Examples: compulsive shoppers (revealing choice utility) buy
stuff they dont use (experience utility); children drug and addicts
(craving/wanting; consumption/choosing; not pleasurable)
Presumption in neurosciences: different types of utility are
produced in different brain regions
42. Preferences
Utility of money
Economics: People are expected to value money for what it can
purchase -> indirect utility of income
Neuroeconomic evidence suggests that money can be directly
rewarding -> direct utility of income
Monetary rewards seem to activate the same brain region
(dopaminergic neurons in the midbrain) that is active for a wide
variety of rewarding experiences
Possible explanation for why workaholics and very wealthy
people keep working even though the marginal utility of goods
purchased with their marginal income is very low
Pain of paying..., credit cards or preference for fixed payment
plans rather than marginal-use pricing
43. Flat rates
Many studies show that consumers choose flat rates even though
marginal use schemes would be optimal, i.e., cost less (telephone,
fitness studio)
Explanations
Risk aversion (knowing the cost vs. uncertain cost)
Mental accounting and neuro perspective (pain of paying), see,
e.g., Prelec/Loewenstein (1998)
They ask Ss whether they enjoy using different products more
when paying flat rates or marginal use schemes: 48 percent prefer
flat rate, only 19 percent prefer marginal use scheme (fitness
studio, phone, traffic etc.)
Laziness
Overestimation effect (wrong subjective prob. of using a
particular good)
Commitment device
44. Preferences
Source of income
Economics: utility of income is independent of its source
Neuroeconomic evidence: earned money is more rewarding than
unearned money
Greater activity in the striatum (midbrain region) for earned
income (Zink et al 2004)
Implications for welfare and tax policies?
Workfare vs. welfare
45. What is better: welfare or workfare? A little digression
Workfare programs introduced in several countries
Unlike regular public assistance, workfare requires recipients
to spend time on mandatory activities such as community work
Economic theory predicts that workfare increases the incentive
for benefit recipients to seek regular employment, because the work
requirement reduces the attractiveness of being on public
assistance
However, workfare is often claimed to be unfair
Can Neuroeconomics provide additional support?
46. This study (Falk, Huffman and Mierendorff 2006)
Study the incentive effects of workfare
Assess potential political support/resistance with respect to
workfare