Neuroeconomics. Decision Making and the Brain

575 Pages·2014·57.117 MB·English

by  Paul W. Glimcher and Ernst Fehr (Eds.)

NEUROECONOMICS
SECOND EDITION
NEUROECONOMICS
Decision Making and the Brain
SECOND EDITION
Edited by
P W. G
AUL LIMCHER
NewYorkUniversity,NewYork,NY,USA
E F
RNST EHR
UniversityofZurich,Switzerland
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Preface
USING THE BOOK
Since the publication ofthe first edition of this book,
there has been an increasing institutional recognition
of the importance of Neuroeconomics in the future of Oneofthecriticalchallengesfacinganyoneinterested
neuroscience, economics, and psychology. At the time in Neuroeconomics isthe interdisciplinary nature of the
that the first edition was published, just a handful of science. To be a neuroeconomist one must be fluent in
academic institutions included scientists engaged in the languages of Economics, Psychology, Neuroscience,
neuroeconomic research, but the field has matured and (to a lesser degree) Primate Anthropology. We
at an astonishing rate over the past 5 years. Today recognize that very few scholars or students will come
scholars at nearly a hundred institutions worldwide tothisbookwithabackgroundinalloftheseareas,and
are at work on neuroeconomic problems and courses the first section of the book is designed to address that
on neuroeconomics are now commonplace at both the constraint before the later sections of the book are
graduate and undergraduatelevels. encountered.
At the time that the first edition of this volume was
published, it was also true that very little was known
about the biological mechanism of human and animal Section 1
decision making. Accordingly, the first edition was
primarily designed to provide scholars interested in Accordingly, the first section of this book is broken
beginning to undertake neuroeconomic research with a into4components.Chapters1and2describethetheory
strong interdisciplinary background in the area. Today, and methods of experimental economics. For someone
however, the landscape is quite different. Over the past trained in economics these chapters would be entirely
5 years the field of neuroeconomics has matured intel- superfluous. They are intended for neurobiologists and
lectually as well as institutionally. Thanks to the work psychologists who are trying to get a handle on eco-
of hundreds of cutting-edge scholars, we now know nomic thought as a preparation for the second through
quite a lot about how and where decisions are made in fifth sections of the book. For someone who knows a
the brain, and that is reflected in the structure of this little economics but who has not been formally trained
secondedition. in economics, these two chapters are essential. Chapters
As we did in the first edition, we continue to believe 3 and 4 (along with the appendix) provide a survey
that a strong interdisciplinary background is important of the psychology of Judgment and Decision Making.
forscholarsinthisarea,butwenowconfinethatreview These chapters should be of particular value to econo-
to the first section of the book. The second section pre- mists and neuroscientists unfamiliar with that tradition.
sents what is known to date about the neural structure Chapters 5 and 6 are designed to provide basic literacy
of preferences ranging from risk attitudes to social pre- in the fundamental methodologies of neuroscience for
ferences, and to inter-temporal choice. The third section non-neuroscientists. Social scientists who hope to make
focusesonthelearningofvaluesandtheneuralsystems sense of the empirical chapters that follow are urged
centraltoourunderstandingoftheneuralrepresentation to take particular care in reading Chapter 5 which pro-
of subjective value. Section 4 examines what is known vides a primer on basic neuroscience and Chapter 6
about the choice process itself; the mechanism inter- which describes the many methods of neuroscientific
posed between the valuation processes described in research. Even for those non-neuroscientists familiar
Section 3 and behavior. Section 5 expands on social with basic neuroscience, Chapter 6 should provide
studies of decision making, an important frontier in a valuable source for understanding the limitations of
neuroeconomic research today. The book concludes methods employed in neuroscientific research that can
with an appendix describing the prospect theory of be consulted as one reads the rest of the book. Finally,
Kahneman and Tversky in detail. It provides important Chapter 7 provides a useful introduction to the study
practical information on the use of prospect theory in of non-human animals in decision making. For those
neuroeconomicexperiments. whose work, or studies, have focused exclusively on
ix
x
PREFACE
human decision makers, this chapter should provide a dopamine. This is an area where tremendous progress
clear motivation for understanding the studies of has been made in computational neuroscience and
non-human decision makers provided throughout this the chapter provides a clear summary of the mathe-
volume. matical and empirical bases for understanding how
For instructors using this volume as a textbook in “values” are learned by the mammalian brain. This
a graduate or undergraduate class, the first section will be new material for many economist readers, but
should typically not be presented in its entirety. If the even for neurobiologists familiar with studies of the
course is, for example, being presented in a depart- neurotransmitter dopamine, this chapter should pro-
ment of psychology as an advanced elective, Chapters vide an important computational foundation. The sec-
1 and 2 may be all that is required for most students. ond chapter of the section, Chapter 16, extends these
If the course is for students from many backgrounds, ideas with a review of advanced topics in reinforce-
Section 1 may be an appropriate object for self-study ment learning. Together Chapters 15 and 16 should
early in the class sequence. provide an essential starting point for anyone inter-
ested in the neural basis of valuation. Chapter 17
builds on these ideas, and requires some familiarity
Section 2
with the material in Chapter 15. It discusses advanced
topics in value encoding in other brain areas and pre-
The second section of the book presents core concepts
sents data on current research frontiers in reinforce-
that guide much neuroeconomic research. The section
ment learning. The section concludes with Chapter 18
begins with a first chapter that deals with the basic
which presents alternative views of many of the ideas
neural foundations of subjective value in simple binary
presented in the first three chapters of this section (cid:1)
choicesituationsandisfollowedbychaptersthatengage
including important challenges to the core theories
centralnotionsin neuroeconomicresearch.Severalof the
presented in the preceding chapters. This chapter will
chapters of this section focus on the notion of preferences;
beof particularinterestto behavioral economists.
theydescribeacoreideainthestudyofdecisionmaking
at both a behavioral and a neuroscientific level of analy-
sis. Thus Chapter 9 in this section presents a detailed Section 4
account of the notion of risk-preference. It describes eco-
nomic and psychological models of risk preferences that The fourth section presents an overview of the
have guided neuroscientific research and then provides choice process: the neural mechanism that takes value
a detailed review of current neuroeconomic research in or sensory evidence as an input and triggers action
this subarea. Other chapters in this section develop this as a behavioral output. It begins with two chapters
same theme for intertemporal preferences, social prefer- that examine the two main neuroscientific threads in
ences, and for the impact of emotion on preferences. the study of choice: perceptual decision making and
Chapter 13 describes a wealth of research suggesting value-based decision making. These are followed by a
that neural activity encodes the value of goods and series of chapters that examine advanced topics in
action in a single common neural currency (cid:1) an idea this area. Chapter 21 describes evidence that multiple
closelyrelatedtotheeconomicnotionofutility.Overthe neural systems interact during the choice process.
last decade, this idea has emerged as a central theme in Chapter 22 examines cutting-edge research on the
neuroeconomic research and this chapter reviews those multiple brain systems that integrate costs and bene-
important findings. The section closes with a review of fits in the generation of choice. Chapter 23 describes
what might be called the chemistry of choice (Chapter 14). neuron-level modeling that is beginning to reconcile
It examines an emerging thrust of neuroeconomics: the perceptual, value-based, and cost-related decision
study of how pharmacologic agents like the hormone making in a single framework. The final chapter in
oxytocin influence choice behavior. To achieve that goal this section examines well-known violations of tradi-
it provides a basic review of neuropharmacology that tional choice theory and explores the emerging notion
will be of particular interest to non-neuroscientific that neurobiological constraints may underlie many
readers. of these phenomena.
Section 3 Section 5
The third section of the book focuses on how we This section concludes the volume with an overview
learn and represent value. The first chapter in this of social decision making, within the framework of
section (Chapter 15) provides a much-needed overview game theory. Building explicitly on the material pre-
of the neurobiology of reinforcement learning and sented in Chapter 11 and in Chapter 2, this section of
xi
PREFACE
the book explores the neurobiology of social decision prospect theory has played a key role in the develop-
making in some detail. It begins with an overview of ment of neuroeconomics, but the theory is more
behavioral game theory in Chapter 25 at the behavioral complicated than is generally realized. This chapter
and neural levels. It then proceeds to studies of the thus serves two goals. First, it should provide a
neurobiology of game theoretic behaviors in non- detailed and highly valuable how-to guide explain-
human primates, an area of very active research at this ing how prospect theory should, and should not,
time. It concludes with a review of neurobiological be used in the laboratory. Second, it provides an
studies of empathy and the theory of mind, which overview of current neuroeconomic research on the
guidesneuroeconomicstudiesofsocialbehavior. foundations of prospect theory. Slightly longer than
most of the other chapters in the book, it should
Appendix provide an invaluable hands-on reference for anyone
planning prospect theoretic research.
The volume concludes with a very detailed appen-
PaulGlimcher and Ernst Fehr
dix on prospect theory. Kahneman and Tversky’s
Acknowledgments
We would like to thank the many people whose hard Finally, we wish to express our thanks to those
work made this volume possible. First and foremost who made this book possible. To Johannes Menzel
we want to acknowledge the hard work of the many of Elsevier who was the editor of the first edition, to
hundreds of independent researchers whose work is April Graham who served as the book’s associate edi-
represented in this volume. The authors of the book, tor at Academic Press and to Mica Haley at Academic
anecessarilysmallsubsetofthosescientists,haveworked Press who was our editor. Finally, and most impor-
hard to encapsulate the staggering accomplishments of tantly, we want to express our truly undying grati-
theirpeers.Theyhavedonewhatwetaketobeanamaz- tude to one of most important people in the field
ing job, although we acknowledge that even this huge of Neuroeconomics, Samanta Shaw. Samanta is one of
volumeisincompletebecausethefieldofneuroeconomics the great heroes of the birth of neuroeconomics,
grows every day. We ask the forgiveness of the many although she is little known outside the core of the
scholarswhoseworkhasreceivedinadequatecoverage. field. For the last 5 years she has served as the admin-
We would also like to express particular thanks to istrative director of the Society for Neuroeconomics
the authors of the first edition of this volume. The first and in that capacity she has probably done more to
edition was much more a survey of neuroeconomics further the field than anyone else. As the de facto editor
and much less a textbook than is this volume. In order of this volume she has prepared the second edition (as
to make it more of a text, we were forced to signifi- she did the first edition) through submission, revision,
cantly reduce the number of authors and to sharpen revision again, production, and marketing. We, and all
the focus of the book. The authors of the first edition of neuroeconomics, owe her an immeasurable debt.
were gracious in allowing us to reuse material from Thanks, Sam.
that edition where it seemed appropriate and we here
express our gratitude to them for their contribution. PaulW.Glimcher and Ernst Fehr
xiii
List of Contributors
Adele Diederich Jacobs University, Bremen gGmbH, Joshua I. Gold University of Pennsylvania School of
Bremen,Germany Medicine,Philadelphia,PA,USA
AndrewCaplin NewYorkUniversity,NewYork,USA Karolina M. Lempert New York University, New York,
Anita Tusche Max Planck Institute for Human Cognitive NY,USA
andBrainSciences,Leipzig,Germany Kenji Doya Okinawa Institute of Science and Technology,
Antonio Rangel CaliforniaInstituteofTechnology,Pasadena, Okinawa,Japan
CA, USA; California Institute of Technology, Pasadena, CA, Kent C. Berridge University of Michigan, Ann Arbor MI,
USA USA
BenedettoDeMartino University College London, London, KenwayLouie NewYorkUniversity,NewYork,NY,USA
UK; California Institute of Technology Pasadena, USA KevinMcCabe MasonUniversity,Arlington,VA,USA
ChristianC.Ruff UniversityofZu¨rich,Zu¨rich,Switzerland LaurieR.Santos YaleUniversity,NewHaven,CT,USA
Colin F. Camerer California Institute of Technology, Matthew F. S. Rushworth University of Oxford, Oxford,
Pasadena,CA,USA UK
Craig R. Fox UCLA Anderson School of Management, Los Michael C. Dorris Queen’s University, Kingston ON,
Angeles,CA,USA Canada; Chinese Academy of Sciences, Shanghai, China
DaeyeolLee YaleUniversityNewHaven,CT,USA Michael L. Platt Duke University, Durham, NC, USA;
DanielHouser GeorgeMasonUniversity,Fairfax,VA,USA DukeUniversity,Durham,NC,USA
Elizabeth A. Phelps New York University, New York, NY, Minoru Kimura Tamagawa University, Machida Tokyo,
USA Japan
ElkeU.Weber ColumbiaUniversity,NewYork,NY,USA Molly J. Crockett University College London, London, UK;
EricJ.Johnson ColumbiaUniversity,NewYork,NY,USA UniversityofZu¨rich,Zu¨rich,Switzerland
ErnstFehr UniversityofZu¨rich,Zu¨rich,Switzerland NathanielD.Daw NewYorkUniversity,NewYork,USA
HaukeR.Heekeren FreieUniversita¨tBerlin,Berlin,Germany PaulW.Glimcher NewYorkUniversity,NewYork,USA
Hilke Plassmann INSEAD, Fontainebleau, France; Ecole Phillipe N. Tobler University of Zu¨rich, Zu¨rich,
NormaleSupe´rieure,INSERM,Paris,France Switzerland
IanKrajbich UniversityofZu¨rich,Zu¨rich,Switzerland RogerRatcliff OhioStateUniversity,OH,USA
JeromeR.Busemeyer IndianaUniversity,IN,USA Russell A. Poldrack University of Texas at Austin, Austin,
TX,USA
John A. Clithero California Institute of Technology,
Pasadena,CA,USA ScottA.Huettel DukeUniversity,Durham,NC,USA
John P. O’Doherty California Institute of Technology, Tania Singer Max Planck Institute for Human Cognitive
andBrainSciences,Leipzig,Germany
Pasadena,CA,USA
Jonathan D. Wallis University of California at Berkeley, ToddA.Hare UniversityofZu¨rich,Zu¨rich,Switzerland
Berkeley,CA94720,USA Xiao-Jing Wang New York University, New York, NY,
Joseph W. Kable University of Pennsylvania, Philadelphia, USA;NYUShanghai,Shanghai,China
PA,USA YaelNiv PrincetonUniversity,Princeton,NJ,USA
xv
Introduction: A Brief History
of Neuroeconomics
Paul W. Glimcher and Ernst Fehr
With significant material from the first edition by Colin F.Camererand RussellA. Poldrack
Neuroeconomics has its origins in two places, in Beginninginthe1930sagroupofeconomists(cid:1)most
events following the neoclassical economic revolution famously, Samuelson, Arrow, and Debreu (cid:1) began to
of the 1930s and in the birth of cognitive neuroscience investigate the mathematical structure of consumer
during the 1990s. So we begin this brief history with a choice and behavior in markets. Rather than simply
review of the neoclassical revolution and the birth of building models that incorporated a set of parameters
cognitive neuroscience. thatmight,onaprioripsychologicalgrounds,bepredic-
tive of choice behavior, this group of theorists began to
investigate what mathematical structure of choices
might result from simple, more “primitive,” assump-
NEOCLASSICAL ECONOMICS tions on preferences. Many of these models (and the
styleofmodelingthatfollowed)hadastrongnormative1
The birth of economics is often traced to Adam flavor,inthesensethatattentionwasmostimmediately
Smith’s publication of The Wealth of Nations in 1776. focused on idealized choices and efficient allocation
With this publication begins the classical period of of resources (as opposed to necessarily seeking to
economic theory. Smith described a number of phe- describe how people choose, as psychologists do, and
nomena critical to understanding choice behavior and howmarketswork).
the aggregation of choices into market activity. These To better understand this approach, consider what
were, in essence, psychological insights. They were is probably the first and most important aspect of these
relatively ad hoc rules that explained how features of simple models. Instead of assuming that an unknown
the environment influenced the behavior of a nation internal property that we may call “preference” or
of consumers and producers. “utility” causeschoices,this approachtakes only choices
What followed the classical period was an interval as primitives and subsequently asks whether choices
during which economic theory became very heteroge- can be represented by some form of preference or utility
nous. A number of competing schools with different function. In other words, preferences and utility func-
approaches developed. Many economists of the time tions have no independent existence from choices. They
(Edgeworth, Ramsey, Fisher) dreamed about tools to are just a way of representing or redescribing the object
infer value from physical signals, through a “hedoni- of interest (cid:1) choices. To see what this means, assume
meter” for example, but these early neuroeconomists thatanindividualwhocanchoosebetweenanappleand
did not have such tools (Colander, 2007). an orange, chooses the orange. Then we can represent
Oneschoolofthought,duetoJohnMaynardKeynes, this choice by assigning a higher number to the orange,
was based on the view that regularities in consumer say 10 for the orange and 9 for the apple and by adding
behavior could (among otherthings) provide a basis for the assumption that higher numbers represent preferred
fiscalpolicytomanageeconomicfluctuations.Manyele- objects. We can also call this a utility function, meaning
mentsinKeynes’theory suchasthe“propensitytocon- that U(orange)510 and U(apple)59. Clearly this utility
sume” or entrepreneurs’ “animal spirits” that influence function represents the individual’s choice but so does
their investment decisions were based on psychological any other function that assigns a higher number to the
concepts.ThisframeworkdominatedUnitedStatesfiscal orange. It is thus transparent that utility functions only
policyuntilthe1960s. represent choice and have no independent explanatory
1Inthelanguageofeconomicsonetypicallydistinguisheswhatarecalledpositiveandnormativetheories.Positivetheoriesarethose
whichseekonlytopredictfuturebehavior,eitherbyindividualsorbyeconomies.Normativetheoriesarethosethatseektomake
statementsaboutwhatchoicesare“best,”orinthelanguageofeconomicswelfaremaximizing.Positivetheoriesarethusdescriptive,
andnormativetheoriesprescriptive.
xvii
xviii INTRODUCTION:ABRIEFHISTORYOFNEUROECONOMICS
power. They are merely a convenient tool for capturing theessenceofthings....Purepoliticaleconomyhastherefore
adecision-maker’schoices. agreatinterestinrelyingaslittleaspossibleonthedomainof
psychology.
The most important consequence of this approach is
Busino(1964;p.xxiv)
that it made economics independent from psychology
(and neuroscience) because all economists need to
The revealed preference revolution in economics
study is choices while questions about the neural and
achieved Pareto’s goal on the basis of clear conceptual
psychological processes behind choices are irrelevant
foundations and it took several decades until econom-
as long as human decision making obeys some simple
ics returned to psychology as an important source of
consistency axioms such as the Weak Axiom of Revealed
insights.
Preference (or WARP) or the Generalized Axiom of
What followed the development of WARP and
Revealed Preferences (GARP). Both of these axioms are
GARP were a series of additional theorems of this type
discussed in greater detail in Chapter 1 of this book.
which extended the scope of revealed-preference theory
GARP essentially means that an individual’s choices
to choices with uncertain outcomes whose probabilities
are transitive while WARP means that if an individual
are known (von Neumann and Morgenstern’s expected
chooses an orange over an apple when both are
utility theory, EU (1944); Chapter 1) or subjective (or
available in situation 1, then the individual should not
“personal,” in Savage’s subjective EU theory; SEU;
choose the apple over the orange in another situation
Chapter 9), and in which outcomes may be spread over
where again both are available. Neoclassical econo-
time (discounted utility theory; Chapter 10). What is
mists such as Samuelson and Houthakker have shown
mostinterestingaboutthesetheoriesisthattheydemon-
that if individuals obey these consistency axioms pow-
strate, amongst other things, that a chooser who obeys
erful implications follow. In particular, their behavior
these axioms must behave both “as if” he has a utility
can be represented by the maximization of some utility
function that constitutes a functional relation between
function, implying that they behave as if they maxi-
outcomes and their utilities and “as if” his actions were
mize some utility function. In addition, the consistency
aimed atmaximizingtotal utility. In their seminal book,
axioms are directly testable at the behavioral level; the
von Neumann and Morgenstern also laid the founda-
existence of utility functions can be subjected to rigor-
tionsformuchofgametheorywhichtheysawasaspecial
ous empirical tests. For example, if individuals violate
problem in utility theory, in which outcomes are gener-
WARP then their behavior cannot be rationalized by
atedbytheinteractingchoicesofmanyplayers.
anyutility function.
At the end of this period, neoclassical economics
The revealed preference approach, which forms
seemed incredibly powerful. Starting with a few sim-
much of the subject matter of Chapters 1 and 2, thus
ple assumptions which fully described a new theory
starts from a set of assumptions called axioms which
(for example, expected utility theory), the neoclassi-
encapsulateatheoryofsomekind(oftenaverylimited
cists developed a framework for thinking about and
one) in formal language. The poetry in the approach
predicting choice. These theories of consumer choice
(what distinguishes a beautiful theory from an ugly
would later form the basis for the demand part of
one) is embodied in the simplicity of the axioms, and the Arrow(cid:1)Debreu theory of competitive “general”
the degree to which surprisingly simple axioms make
equilibrium, a system in which prices and quantities
sharp predictions about what kind of choice patterns
of all goods were determined simultaneously by
should and should not be observed. Finally, it is
matching supply and demand. This is an important
critical to note that what the theory predicts is what
tool because it enables the modeler to anticipate all
new choices could possibly follow from an observed
consequences of a policy change: for example, impos-
set of previous choices (including choices that respond
ing a luxury tax on yachts might increase crime in a
to policy and other changes in the environment such
shipbuilding town because of a rise in unemployment
as responsesto changes inprices, taxes, or incomes).
there. This sort of analysis is unique to economics and
It cannot be emphasized enough how much the
partly explains the broad influence of economics in
revealed-preference view suppressed interest in the psy-
regulation and policymaking.
chologicalnatureofpreference,becausecleveraxiomatic
Whilethe“asif”approachhasathoroughconceptual
systemscouldbeusedtoinferpropertiesofunobservable
and mathematical foundation, and testable predictions,
preference from observable choice (Bruni and Sugden,
in the realm of revealed preference theory, Milton
2007). Before the neoclassical revolution, Pareto noted in
Friedman extended the “as if” argument to other
1897that:
domains in a rather questionable way, and without a
rigorous foundation. In the 1950s, Friedman wrote an
It is an empirical fact that the natural sciences
influential book, The Methodology of Positive Economics.
haveprogressedonlywhentheyhavetakensecondaryprinci-
Friedman argued that assumptions underlying a
ples as their point of departure, instead of trying to discover