Neuroeconomics

author: Drazen Prelec, Sloan School of Management, Massachusetts Institute of Technology, MIT
published: Sept. 10, 2010,   recorded: July 2008,   views: 1206
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Description

A pioneer in a “dangerously hot research area,” Drazen Prelec peers into the human brain while it makes decisions. In his corner of the new field of neuroeconomics, Prelec uses a functional magnetic resonance imaging (fMRI) machine to scan minds pondering the pros and cons of purchasing and selling products like Godiva chocolate and flash drives.

Prelec first provides a brief background on the emergence of his discipline, made possible by technological advances in measuring brain activity, and the recent introduction of psychology into economics. The convergence (or perhaps collision) of behavioral approaches and economics has led to a “sustained criticism of the rationality assumption in economics,” says Prelec, most prevalent in game theory. So much current research, he says, “is a series of responses to the incorrect predictions of the rational normative model.”

Some Nobel Prize-winning work has emerged in the past few decades from studying the differences between the way human beings actually behave and the way classic economics suggests. Prelec describes prospect theory, which captures in a formula how there is “something about the way our mind deals with numbers (so that) if you look at positive things, you have one way of looking, and at negative, it’s a different way.”

Using three case studies, Prelec illustrates how “neuroeconomics picks up some of these violations of rationality, trying to understand where in the brain we can get a deep understanding of what’s going on.” In a notable instance, subjects sipped different wines (through a straw) in the fMRI, and were asked to rate them. They were told they were drinking wine that ranged in price from $5 to $90. The “dirty trick was the $5 and $45 wines were the same, as were the $10 and $90 wines.” Not surprisingly, “ratings were massively influenced by price,” so the $90 wine was considered exceptional.

What was surprising, says Prelec, was that “the brain lies also.” An area behind the forehead, the medial prefrontal cortex, which is associated with the perception of value, burst into more activity when the subject experienced the “$90” wine than with the exact same “$10” wine. It seems as if the very idea of quality, or value -- often a marketing ploy -- makes a product like wine more enjoyable.

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