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Abstract:
We review recent developments in neuroeconomics and their implications for economics. The paper consists of six sections. Following the Introduction, the second section enumerates the different research methods that neuroscientists use evaluates their strengths and limitations for analyzing economic phenomena. The third section provides a review of basic findings in neuroscience that we deemed especially relevant to economics, and proposes a two-dimensional dichotomization of neural processes between automatic and controlled processes on the one hand, and cognitive and affective processes on the other. Section four reviews general implications of neuroscience for economics. Research in neuroscience, for example, raises questions about the usefulness of many economic constructs, such as 'time preference' and 'risk preference'. It also suggests that, contrary to the assumption that humans are likely to possess domain-specific intelligence - to be brilliant when it comes to problems that the brain is well evolved for performing and flat-footed for problems that lie outside of the brains existing specialized functions. Section 5 provides more detailed discussions of four specific applications: intertemporal choice, decision making under risk and uncertainty, game theory, and labor-market discrimination. Section 6 concludes by proposing a distinction between two general approaches in applying neuroscience to economics which we term 'incremental' and 'radical'. The former draws on neuroscience findings to refine existing economic models, while the latter poses more basic challenges to the standard economic understanding of human behavior.

Neuroeconomics, neuroscience

Abstract:
In three experiments, subjects stated their willingness to accept pain ? from listening to annoying sounds ? in exchange for payment (WTA). Subjects were presented with annoying sounds of different durations, indicated their WTA, and received the sounds and payment that resulted from their prices. At the onset of each experiment subject were asked to listen to the sound. Since the sound was very simple, from that point subjects had full information about the hedonic experience. After the initial exposure subjects were asked to state whether, hypothetically, they would be willing to listen to the noise for 30 seconds for either a large or small payment. Subsequently, their actual WTA was elicited to listen to the noise for different intervals (10, 30 and 60 seconds in the first experiment). WTA values exhibited a pattern that we label "coherent arbitrariness." Suggestive of coherence, prices were systematically related to noise duration. But, suggestive of arbitrariness, prices were powerfully influenced by the arbitrary high/low anchor accompanying the hypothetical question. The first study documented the effect at the individual level, the second in experimental markets, and the third examined more deeply the effect of the initial anchor.

Abstract:
This paper challenges the common assumption that economic agents know their tastes. After reviewing previous research showing that valuation of ordinary products and experiences can be manipulated by non-normative cues, we present three studies showing that in some cases people do not even have a pre-existing sense of whether an experience is good or bad - even when they have experienced a sample of it.

Preferences, preference uncertainty, coherent arbitrariness

Abstract:
Neuroeconomics uses knowledge about brain mechanisms to inform economic theory. It opens up the "black box" of the brain, much as organizational economics opened up the theory of the firm. Neuroscientists use many tools - including brain imaging, behavior of patients with brain damage, animal behavior and recording single neuron activity. The key insight for economics is that the brain is composed of multiple systems which interact. Controlled systems ("executive function") interrupt automatic ones. Brain evidence complicates standard assumptions about basic preference, to include homeostasis and other kinds of state-dependence, and shows emotional activation in ambiguous choice and strategic interaction.

Abstract:
Despite recent interest in hyperbolic discounting, there has been little discussion of exactly what property of time preferences is instantiated by hyperbolic or quasi-hyperbolic functional forms. The paper revives an earlier proposal in Prelec (1989) that the key property is Pratt-Arrow convexity of the log of the discount function, which corresponds to (DI) at the level of preferences. DI provides a natural criterion for assessing the severity of departure from stationarity in that greater DI is equivalent to more choices of dominated options in two-stage decision problems, as well as greater convexity of the log of the discount function. Inefficient choices may arise as intentional precommitments, or as unintended reversals of preference by "naive" agents.