Economics, as it has evolved over the past 150 years, has generalized from stylized assumptions about the preferences of isolated individuals motivated by money and changes in the relative prices of consumer goods. But evidence from behavioral neuroscience calls these assumptions into question. This section explains the tensions between the assumptions of mainstream economics and growing insights from behavioral science and neuroscience. It is important to understand the neoclassical economic model because it still dominates the public policy debate. Whether or not we agree with the model we always confronted with its assumptions and policy implications. For example, it is this model that underlies arguments for pricing biodiversity and for market-based tools like carbon trading to mitigate climate change.
It is now widely recognized that the most serious shortcoming of the standard economic model—the mathematical formulation is called the Dynamic Stochastic General Equilibrium (DSGE) model—is that it must assume that human behavior is self-regarding. The mathematical constraints of the model dictate that decisions of one individual cannot be influenced by the behavior of others. Without the assumption of independent (self-regarding) preferences the whole mathematical edifice of the DSGE model comes crashing down like a house of cards (Gowdy 2010), and with it many if not most of the tools of contemporary economics (marginal analysis, constrained optimization techniques) and policy recommendations (privatization, more trade).
There is, of course, a long history of dissent within the economics profession with respect to the DSGE model. Thorsten Veblen’s description of rational economic man made over 100 years ago still rings true today:
The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-imposed in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before. Spiritually, the hedonistic man is not a prime mover. He is not the seat of a process of living, except in the sense that he is subject to a series of permutations enforced upon him by circumstances external and alien to him. (Veblen 1898)
It might be a monumental task to replace the DSGE model with realistic assumption about human behavior but it's not as if we're starting from scratch. A more recent, and already influential, critique of characterizing humans as “self-contained globules of desire” was made by Nobel laureate George Akerlof in his 2007 Presidential address to the American Economic Association (Akerlof 2008). Akerlof called for a redirection of current economic theory starting again with Keynes and identifying the “norms” that determine human behavior. Akerlof’s address has been compared to Milton Friedman’s presidential address in 1968 that set a new course toward “Chicago School” economics in the 1970s and 1980s. Louis Uchitelle, writing in the New York Times, observed: “His speech as the outgoing president is an attempt to set economics on a new path, a path that departs from the theoretical foundations of modern macroeconomic models by including social norms of behavior into the theoretical structures.” This was written before the financial collapse of 2008 which seemed to be the final nail in the coffin for DSGE economics. But see John Quiggin’s (2010) book Zombie Economics for an excellent analysis of the resilience of the neoliberal model in spite of a mountain of evidence refuting it.
Insights from behavioral science and neuroscience are beginning to change the perspective of traditional economics in fundamental ways.
New findings about how money affects decision making may provides insights to issues ranging from economic growth to understanding the nature of incentives. In the standard view of economics embodied in DSGE models, money is considered to be a tool to facilitate economic exchange. In these models there is no essential difference between a barter economy and a money economy with respect to economic outcomes. Money has no effect on the real (disregarding inflation) economy. In economic jargon money is “neutral” in the long run. Debate has raged among economists as to whether or not there exists a "money illusion" that may introduce a time lag between changes in the money supply and perceptions of the effect of such a change on purchasing power. But generally, most economists subscribe to a tool theory of money and they attach no particular explanatory power to money itself (Lea and Webley 2006).
By contrast, findings from neuroscience and behavioral economics indicate that money itself has some profound effects on how people feel and act in a variety of market and non-market situations (Cassidy 2006, Knutson et al. 2001, McClure et al. 2004, Spreckelmeyer at al. 2009, Vohs et al. 2006). These findings have helped assess some long-standing controversies in economics (for example, there is a money illusion), and they also point to new research agendas. Among the problems of interest are the following:
1. Is money not only a tool but also a drug? Economists consider money to be a tool, serving the purposes of (1) a medium of exchange, (2) a store of value and (3) a unit of account. In this view, we only need to understand the economic job that money does. Recent work by psychologists suggests that money may also be a kind of drug desirable in its own right. Lea and Webly (2006) present a strong case for the money as a drug theory. People seem to discount money differently than goods, money can apparently be a substitute for social interactions in some cases, and the presence of money can reduce social behavior including altruism. What are the implications of these findings for economic theory and policy? According to Lea and Webly (2006, 164), a drug is some substance that “acts in the same way as a body chemical and is therefore able to intrude upon the normal functioning of the nervous system.” If money acts as a drug, then it may have the same effect on the brain as a natural motivator but may not have the same benefits. Many examples in the biological world illustrate these “unnatural” motivators. Lea and Webly (2006, 164) write:
[C]ardboard disks elicited sexual pursuit in Grayling butterflies, a striped knitting needle elicited begging in herring gull chicks, and an Easter egg elicited brooding in graylag geese…Although it is to the Grayling’s evolutionary advantage to court a female Grayling, the butterfly gains nothing in fitness terms by pursuing a cardboard disk…In all cases that have been investigated, the artificial sign stimuli discovered by the ethologists have the same reinforcing or incentive effects as the natural stimuli they mimic. They therefore constitute a kind of functionalist motivator.
This is not to suggest that money plays no positive role to individuals in our society. It is a tool that allows us to obtain life’s necessities. It is also important as a status symbol and even in attracting desirable mates. It may be that money acts a signal to potential mates that its possessor is a fit prospect, much like a successful hunter in earlier societies (Smith 2004). But other experiments suggest that money is much more profound and intrusive in human societies than a mere proxy for biological fitness.
Experiments suggest that the mere mention of money may make people more individualistic and less social. A recent experiment by Vohs, Mead and Goode (2006) found that the mere mention of “money” had a negative effect on sociality. In one experiment one group of people were first given reminders of “money” and another group was given a “non-money” reminder. Participants were asked to unscramble jumbled words to make phrases. In the money group the phrases involved some concept of money, like “a high-paying salary is important.” In the control group the phrases were neutral, like “it is cold outside”. This reinforced thinking in terms of money in the experimental group but not the control group. The groups were then subjected to nine experiments designed to test the effects of exposure to money on “self-sufficiency” and helpful behavior. In one experiment subjects were given $2 in quarters which they were told was left over from an earlier experiment. At the end of the word scrambling game they were offered the chance to put money in a box to denote to needy students. Those exposed to reminders of money gave substantially less to the charity. In another experiment subjects reminded of money were less likely to ask for help in performing a complicated task. In another test, subjects were asked to sit at desks and fill out a questionnaire. Some desks faced a poster with a picture of money, and others faced a poster showing flowers or a seascape. They were then asked to choose between a reward characterized as a “group” or “individual” activity, for example, individual cooking lessons versus a dinner for four. Those exposed to the money poster were more likely to pick individual activities.
The reasons for this behavior are unclear. It may mean that possessing money gives people more control over their own lives, making them less dependent on the charity of others. Or there may be something deeper going on. There may be biological as well as social reasons why people are so attracted to money. Knutson et al. (2001) used fMRI imaging to look at what goes on in people’s brains when they deal with money. They found that offers of the opportunity to make money activated regions of the midbrain called the nucleus accumbens associated with addiction, fear, insecurity, and selfish behaviors. This may explain why money rarely provides the sense of wellbeing that is associated with close human relationships.
Money and monetary exchanges also have deep social meaning. A large literature exists on the anthropology and sociology of money (Lea et al. 1987, chapter 12, Mauss 1925, Simmel 1900). This literature confirms that a money economy is fundamentally different than an exchange economy (Bohannan, P. 1959). It is well-known that monetary incentives can “crowd out” pro-social behaviors. The classic case is blood donations. When people are paid to donate blood, contributions drop sharply (Titmuss 1971). Private incentives can crowd out public ? incentives (Frey 1997) and private incentives in the form of higher prices can also reinforce social status (Ng 1987). Another study confirming the social nature of monetary rewards was conducted by Fliessbach et al. (2009). Brain scans were used to monitor the brain activity of two male players receiving a substantial monetary reward (from 30 to 120 euros) for correctly estimating the number of dots on a computer screen. As expected the ventral stratum (a part of the brain associated with reward) was activated when the participants received a monetary payment for a good guess. Surprisingly, the reward system was substantially more active when participants were told that the other player was unsuccessful. Similar experiments (Spreckelmeyer et al. 2009) suggest that although both men and women are motivated by anticipation of both monetary and social rewards, women are more responsive to social rewards than are men.
2. What is the evolutionary basis for "money as a drug?" Animal survival depends on responding to positive and negative environmental signals. If money activates parts of the brain responsible for emotions like fear and reward it must have some evolutionary basis. But money is a very recent invention in human history—at most about 3,000 years old. Modern uses of money go back only a few hundred years. Can neuroscience identify brain structures involved in evaluating money incentives? Can this be a guide to understanding the role money plays in view of human evolutionary history? What does money “buy”? How does the evolution of money from coin to paper to numbers on a computer affect consumer behavior?
3. Money and Trust-Evidence is also accumulating that neurological pathways are involved in “trust” games involving monetary rewards. In sequential social dilemma games such as the ultimatum game and centipede game an area in the midbrain called the striatum is activated when people punish those considered to act unfairly (Fehr, Fischbacher and Kosfeld 2005). Punishing others for violating social norms is a rewarding experience. Several studies have identified the role played by the neuropeptide oxytocin in trusting behavior. In one experiment (Kosfeld et al. 2005) two groups of subjects played a social dilemma game involving trust in exchanging money. One group was given oxytocin through a nasal spray and one group was given a placebo. The percentage of people exhibiting maximal trusting behavior was significantly higher in the oxytocin group (45 percent) than in the group receiving the placebo (21 percent). Commenting on the results of these and similar experiments Fehr, Fischbacher, and Kosfeld (2005, 350) write:
Such studies enable us to go beyond the prevailing “as if” approaches in economics by uncovering the neural mechanisms behind individual decisions. In the long term, it may well be that neuroeconomic insights fundamentally change the current “preferences and beliefs” approach that prevails in economics. [Top]
Wexler’s (2007) insight that the distinctive postnatal shaping of the human brain through interaction with other people creates an endless variety of individuals with different functional characteristics has enormous implications for social policy. The range of adaptive capabilities of humans is enormous but they are also shaped by basic Darwinian selection processes—variation, selection, and retention. Humans have a “social self” unique to their particular reference group. The attitudes in different reference groups are “selected” to conform to the norms of a particular group. A distinction can be made between behavior that evolved for its survival characteristics—possibly loss aversion for example—and behavior selected to conform to social norms (although this is not to deny that such behavior may have something to do with physical survival).
1. Individual rationality – The rational actor model of standard economics in some ways focuses on the logic of survival. Its self-referential assumptions of non-satiation (more is preferred to less), perfect assessments of risk, that sunk costs should be ignored, etc., can be traced to survival characteristics in non-human animals. Risk aversion, for example, has an obviously survival advantage for animals who frequently find themselves in dangerous and uncertain situations. This may be why a number of behavioral researchers have observed that “lower animals” are more rational than humans (Arkes and Ayton 1997).
2. Sociality adds another layer to adaptation possibilities – To the extent that culture has solved the problem of individual survival, society creates values over and above purely biological survival rules. As Boyd and Richerson (1992) point out, the existence of social sanctions can lead to the cultural selection of almost any type of behavior imaginable. Cultural variation has a survival advantage in that human societies can quickly adapt to new environmental situations as in the case of technological adaptation to changing environmental conditions during the Pleistocene (Richerson and Boyd 2005).
3. Mismatch Theory - Evolved social customs can also be a hindrance to adapting to environment change as in the case of the Moai culture of Easter Island. Easter Islanders completely deforested their island by cutting down trees to use as skids to move the large stone heads for which Easter Island is famous. When the environmental impact of deforestation began to severely affect their lives, the solution was to build even bigger statues to appease the Gods and in the process cut down more tress. An area of biological research called “mismatch theory” is potentially of great use in the study of social change. An evolutionary trait that was adaptive in an earlier environment may become maladaptive as environmental or social conditions change.
The question also arises as to which behavior patterns are universal and which are culturally specific. Some parts of human social behavior are apparently universal. For example, all humans (from New Guinea tribesmen to Americans according to Wexler) have the same distinct expressions for emotion like fear, disgust or happiness. Children born deaf use the same vocal expression of emotions as do hearing children (Wexler 2007, 33). On the other hand, cultural differences in social and perhaps even neural development are apparent at an early age. Bosch and Sebastián-Gallés (1997) found that 4 months old infants could recognize the difference even between two similar languages (Catalan versus Spanish).
The above discussion makes it clear that the standard rational actor models strips away everything that characterizes the uniqueness of the human species. Even our closest relatives, chimpanzees, act like rational economic men, and not like human beings. Jensen, Call, and Tomasello (2007, 107 Summarize the findings of an ultimatum game experiment with chimpanzees:
Traditional models of economic decision-making assume that people are self-interested rational maximizers. Empirical research has demonstrated, however, that people will take into account the interests of others and are sensitive to norms of cooperation and fairness. In one of the most robust tests of this finding, the ultimatum game, individuals will reject a proposed division of a monetary windfall, at a cost to themselves, if they perceive it as unfair. Here we show that in an ultimatum game, humans’ closest living relatives, chimpanzees (Pan troglodytes), are rational maximizers and are not sensitive to fairness. These results support the hypothesis that other regarding preferences and aversion to inequitable outcomes, which play key roles in human social organization, distinguish us from our closest living relatives. [Top]
From the discussion above about brain plasticity and Von Economo neurons it seems clear that the human brain is specifically designed for social interaction and the extended parent child relationship ensures this rich capacity for intimacy, trust and cooperation is developed. But does this have an evolutionary advantage? The strongest evidence that it does comes from the group selection discussion in evolutionary biology (Sober and Wilson 1998). Group selection refers to a process of natural selection that favors traits that increase the fitness of one group relative to other groups (Wilson, 1997). Every member of the group depends on a common characteristic not isolated in a single individual. Such behavior is the result of Darwinian “selection” but not selection rooted solely in the characteristics of individuals (Richerson and Boyd, 2005, Von den Bergh and Gowdy 2010). Group selection depends on other-regarding interaction among individuals, and is thus incompatible with isolated, self-referential interaction between cultural and genetic transmission. In social animals, natural selection is more likely to favor pro-social behavior than the selfish gene model would predict. Henrich (2004) notes that a purely genetic approach cannot explain the degree of pro-social behavior observed in humans. He suggests that a co-evolutionary process between cultural and genetic transmission is at work. Using a group selection perspective we can pose a scientific explanation for the cooperation and fairness observed in large groups and among unrelated strangers in non-repeated contexts. Given the genetic homogeneity of the human species, the wide variation in degrees of cooperation observed in human societies points to a cultural or environmental origin. In addition, if the large scale cooperation often observed in humans was purely based on genetic natural selection one would anticipate it would be more widespread in nature. Henrich (2004, 30) suggests:
…rooting the development of large-scale cooperation in the details of human social learning, addresses this challenge. Other mammals do not cooperate to the degree humans do because they lack the social learning abilities that produce cultural evolution and behavioral equilibria not available to genetic transmission alone.
A promising line of research is whether or not there exists a kind of “collective intelligence” related to cooperation in human groups. A recent study by Woolley et al (2010) examined the ability of groups, consisting of 2 to 5 people, to solve a variety of tasks. They found evidence for the existence of a general collective intelligence factor that explained group performance. Furthermore they found that:
This “c” factor is not strongly correlated with the average or maximum individual intelligence of group members but is correlated with the average social sensitivity of group members, the equality in distribution of conversational turn taking, and the proportion of females in the group.
This finding begs for further research into the “ideal” composition of groups for making critical decisions. For example, is there an ideal mix of selfish individuals and altruists in collective decision making? Does voting based on individual decisions preclude solutions based on deliberative valuation that might result in better outcomes? [Top]