Commentary on Neuro-Economic Modeling

Posted: 26 Jun 2015

See all articles by Jyoti Satpathy

Jyoti Satpathy

University of Petroleum and Energy Studies

Sasmita Mishra

KIIT University - School of Management

Date Written: June 25, 2015

Abstract

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

Satpathy, Jyoti and Mishra, Sasmita, Commentary on Neuro-Economic Modeling (June 25, 2015). Available at SSRN: https://ssrn.com/abstract=2623023

Jyoti Satpathy (Contact Author)

University of Petroleum and Energy Studies ( email )

Sela Qui
Dehradun
Dehradun, 248007
India
06742382008 (Phone)

Sasmita Mishra

KIIT University - School of Management ( email )

Campus - 7
Bhubaneswar, 751024
India

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