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Neuroeconomics: How Neuroscience Can Inform Economics


Colin Camerer


California Institute of Technology - Division of the Humanities and Social Sciences

George Loewenstein


Carnegie Mellon University - Department of Social and Decision Sciences

Drazen Prelec


MIT Sloan; MIT Department of Economics; MIT Brain and Cognitive Sciences


Journal of Economic Literature, Forthcoming

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.

Number of Pages in PDF File: 92

Keywords: Neuroeconomics, neuroscience

JEL Classification: D00, C82

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Date posted: September 17, 2004  

Suggested Citation

Camerer, Colin and Loewenstein, George and Prelec, Drazen, Neuroeconomics: How Neuroscience Can Inform Economics. Journal of Economic Literature, Forthcoming. Available at SSRN: http://ssrn.com/abstract=590965

Contact Information

Colin F. Camerer
California Institute of Technology - Division of the Humanities and Social Sciences ( email )
1200 East California Blvd.
Pasadena, CA 91125
United States
626-395-4054 (Phone)
626-432-1726 (Fax)
George F. Loewenstein (Contact Author)
Carnegie Mellon University - Department of Social and Decision Sciences ( email )
Pittsburgh, PA 15213-3890
United States
412-268-8787 (Phone)
412-268-6938 (Fax)
Drazen Prelec
MIT Sloan ( email )
E40-161
MIT
Cambridge, MA 02142
United States
617-253-2833 (Phone)
MIT Department of Economics ( email )
Department of Economics
E52-371
Cambridge, MA 02142
United States
MIT Brain and Cognitive Sciences ( email )
43 Vassar Street
Cambridge, MA 02139
United States
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References:  246
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