Journal of Economic Literature
Vol. XLIII (March 2005), pp. 9–64
Neuroeconomics: How Neuroscience
Can Inform Economics
COLIN CAMERER, GEORGE LOEWENSTEIN, and DRAZEN PRELEC
∗
Who knows what I want to do? Who knows what anyone wants to do? How can you
be sure about something like that? Isn’t it all a question of brain chemistry, signals
going back and forth, electrical energy in the cortex? How do you know whether
something is really what you want to do or just some kind of nerve impulse in the
brain. Some minor little activity takes place somewhere in this unimportant place in
one of the brain hemispheres and suddenly I want to go to Montana or I don’t want
to go to Montana. (White Noise, Don DeLillo)
9
∗
Camerer: California Institute of Technology.
Loewenstein: Carnegie Mellon University. Prelec:
Massachusetts Institute of Technology. We thank partici-
pants at the Russell Sage Foundation-sponsored confer-
ence on Neurobehavioral Economics (May 1997) at
Carnegie Mellon, the Princeton workshop on Neural
Economics December 8–9, 2000, and the Arizona confer-
ence in March 2001. This research was supported by NSF
grant SBR-9601236 and by the Center for Advanced Study
in Behavioral Sciences, where the authors visited during
1997–98. David Laibson’s presentations have been partic-
ularly helpful, as were comments and suggestions from the
editor and referees, and conversations and comments from
Ralph Adolphs, John Allman, Warren Bickel, Greg Berns,
Meghana Bhatt, Jonathan Cohen, Angus Deaton, John
Dickhaut, Paul Glimcher, Dave Grether, Ming Hsu, David
Laibson, Danica Mijovic-Prelec, Read Montague, Charlie
Plott, Matthew Rabin, Antonio Rangel, Peter Shizgal,
Steve Quartz, and Paul Zak. Albert Bollard, Esther
Hwang, and Karen Kerbs provided editorial assistance.
1. Introduction
In the last two decades, following almost a
century of separation, economics has begun
to import insights from psychology.
“Behavioral economics” is now a prominent
fixture on the intellectual landscape and has
spawned applications to topics in economics,
such as finance, game theory, labor econom-
ics, public finance, law, and macroeconomics
(see Colin Camerer and George Loewenstein
2004). Behavioral economics has mostly been
informed by a branch of psychology called
“behavioral decision research,” but other
cognitive sciences are ripe for harvest. Some
important insights will surely come from neu-
roscience, either directly or because neuro-
science will reshape what is believed about
psychology which in turn informs economics.
Neuroscience uses imaging of brain activity
and other techniques to infer details about
how the brain works. The brain is the ultimate
“black box.” The foundations of economic
theory were constructed assuming that details
about the functioning of the brain’s black box
would not be known. This pessimism was
expressed by William Jevons in 1871:
I hesitate to say that men will ever have the means
of measuring directly the feelings of the human
heart. It is from the quantitative effects of the
feelings that we must estimate their comparative
amounts.
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10 Journal of Economic Literature, Vol. XLIII (March 2005)
Since feelings were meant to predict behav-
ior but could only be assessed from behavior,
economists realized that, without direct
measurement, feelings were useless inter-
vening constructs. In the 1940s, the con-
cepts of ordinal utility and revealed
preference eliminated the superfluous inter-
mediate step of positing immeasurable feel-
ings. Revealed preference theory simply
equates unobserved preferences with
observed choices. Circularity is avoided by
assuming that people behave consistently,
which makes the theory falsifiable; once
they have revealed that they prefer A to B,
people should not subsequently choose B
over A. Later extensions—discounted,
expected, and subjective expected utility,
and Bayesian updating—provided similar
“as if” tools which sidestepped psychological
detail. The “as if” approach made good
sense as long as the brain remained substan-
tially a black box. The development of eco-
nomics could not be held hostage to
progress in other human sciences.
But now neuroscience has proved
Jevons’s pessimistic prediction wrong; the
study of the brain and nervous system is
beginning to allow direct measurement of
thoughts and feelings. These measurements
are, in turn, challenging our understanding
of the relation between mind and action,
leading to new theoretical constructs and
calling old ones into question. How can the
new findings of neuroscience, and the theo-
ries they have spawned, inform an econom-
ic theory that developed so impressively in
their absence?
In thinking about the ways that neuro-
science can inform economics, it is useful to
distinguish two types of contributions, which
we term incremental and radical approach-
es. In the incremental approach, neuro-
science adds variables to conventional
accounts of decision making or suggests spe-
cific functional forms to replace “as if”
assumptions that have never been well sup-
ported empirically. For example, research on
the neurobiology of addiction suggests how
drug consumption limits pleasure from
future consumption of other goods (dynam-
ic cross-partial effects in utility for commod-
ity bundles) and how environmental cues
trigger unpleasant craving and increase
demand. These effects can be approximated
by extending standard theory and then
applying conventional tools (see Douglas
Bernheim and Antonio Rangel 2004; David
Laibson 2001; Ted O’Donoghue and
Matthew Rabin 1997).
The radical approach involves turning
back the hands of time and asking how eco-
nomics might have evolved differently if it
had been informed from the start by insights
and findings now available from neuro-
science. Neuroscience, we will argue, points
to an entirely new set of constructs to under-
lie economic decision making. The standard
economic theory of constrained utility maxi-
mization is most naturally interpreted either
as the result of learning based on consump-
tion experiences (which is of little help when
prices, income, and opportunity sets
change), or careful deliberation—a balanc-
ing of the costs and benefits of different
options—as might characterize complex
decisions like planning for retirement, buy-
ing a house, or hammering out a contract.
Although economists may privately acknowl-
edge that actual flesh-and-blood human
beings often choose without much delibera-
tion, the economic models as written invari-
ably represent decisions in a “deliberative
equilibrium,” i.e., that are at a stage where
further deliberation, computation, reflec-
tion, etc. would not by itself alter the agent’s
choice. The variables that enter into the for-
mulation of the decision problem—the pref-
erences, information, and constraints—are
precisely the variables that should affect the
decision, if the person had unlimited time
and computing ability.
While not denying that deliberation is part
of human decision making, neuroscience
points out two generic inadequacies of this
approach—its inability to handle the crucial
roles of automatic and emotional processing.
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