Commentary on Neuro-Economic Modeling
Posted: 26 Jun 2015
Date Written: June 25, 2015
Traditional interpretation has relied on revealed preferences and (sometimes) on verbal reports to understand desires of individuals and predict actions. Neuropsycho-economics adds a third method; direct observation of underlying mechanisms leading to choices. Neuroeconomic Model makes one extra step. It uses evidence on brain activity to build models that explain and predict observed behaviors. The advantages are; first, bounded rationality can be modeled in a number of ways. This provides precise guidelines vis-à-vis constraints that should be imposed in decision-making processes. Second, by explicitly modeling strategic interaction between distinct brain systems, it is possible to provide micro foundations for some aspects of preferences traditionally considered exogenous. Theoretical brain models provide new testable implications about functionality of brain systems and their relative importance in different aspects of choice process. Preference-based approach poses axioms on (non-observable) tastes, while choice-based approach defines properties of (observable) choices. As long as rational paradigm holds, consistent choices correspond to rational preferences. If focus is on choices and renounces to draw inferences about preferences, models are bound to be limited to situations in which all possible choices are observed. If, instead, researcher draws inferences about preferences from observation of choices, modeling becomes speculative. This paper proposes is to use not only information on choices but on brain mechanisms that lead to those choices.
Keywords: Revealed Preferences, Bounded Rationality, Brain Systems
Suggested Citation: Suggested Citation