Money on the Brain
There’s a logical reason why we sometimes make irrational decisions—it’s how we are wired.
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Since the early 1900s, economists have assumed that people are governed by reason; that is, they make decisions logically, strategically, and out of total self-interest. This assumption has come under challenge in recent years as behavioral studies have shown, among other things, that people value equity, they overreact to a fear of loss, and they undervalue the future, which is why they don’t save for retirement and they delay starting an exercise routine even as they grab another jelly donut. Behavioral studies account for altruism, which we saw in spades after 9/11. They also demonstrate that the context in which decisions are made are as important as the information itself.
What it comes down to is that we are more like Captain Kirk than Mr. Spock.
Researchers like Hsu are at the vanguard of a new approach to economics called neuroeconomics—a union of economics, psychology, and neuroscience—that has the potential to transform the field of economics in much the same way as brain studies revolutionized psychology a decade ago. By identifying the neural mechanisms operating when people make decisions, Hsu believes economists can understand processes that have been grasped superficially in the past.
“It’s like driving a car without being able to look under the hood. Economists have made these assumptions of rationality because they did not know how to quantify what was going on in that black box we call the brain. Now,” says Hsu, “we’re opening that black box and discovering that we can quantify human behavior, even behavior that seems illogical.”
The situation is similar to how economists had once studied the behavior of firms without looking at the strategic interactions between management and workers.
“The goal isn’t to throw out rational behavior,” adds Steve Williams, the former head of U of I’s Department of Economics and the person most influential in bringing Hsu to Illinois. “Instead, the end result of neuroeconomics will be a more nuanced model of human behavior and knowledge of when these nuances matter.”
Inside the Black Box
Neuroeconomics is more a measurement tool than an approach to economics. MRI scans are among its most flamboyant tools, but it also uses data collected by an alphabet soup of techniques, such as PET, TMS, MEG, pharmacological and hormone changes, and genetic testing.
U of I is an ideal location for these studies because of its exceptional resources for brain imaging and the Department of Psychology’s progressive role in applying brain studies to mental illness and aging. Decision making is a natural progression of that work, and is one reason that the Beckman Institute as well as the Department of Psychology and the Neuroscience Program were so supportive of bringing Hsu to U of I.
Hsu drifted into neuroeconomics while an undergraduate at University of Arizona. He immigrated to Arizona from Shanghai, China, with his grandparents in 1990, when he was 11, to join his parents, who had arrived 10 years earlier. His parents had not wanted him to leave China before he had absorbed its language and the culture. When he was ready to attend college, he chose the local state school, where he built an eclectic resume in political science, economics, and neuroscience, which made him an ideal candidate for a cross-cutting field like neuroeconomics. Hsu also had the good fortune of stumbling upon the lab of Vernon Smith, a Nobel prize-winning pioneer of experimental economics, who took him on as a research assistant and introduced him to the revolutionary work being done by Colin Camerer at the California Institute of Technology.
By Holly Korab