Neuroeconomics looks at how economic decision-making actually happens inside the brain. It is a relatively new field that in broad terms bridges the disciplines of neuroscience, psychology, and economics. These are very complementary disciplines, with psychology and economics in many cases studying the same phenomena: decision making, value-based judgment, and heuristics. Psychology approaches it from a conscious experiential, experiment-driven perspective and economics from an abstract, theoretical perspective.
The difference between psychological and economic approaches
Psychology relies on many assumptions, with complex human behaviour making it difficult to know which ones are valid. So psychologists typically focus on collecting data, deferring the development of formal theory. Economists have historically done the opposite – for them it’s all about theory. The experimental approach of behavioural economics is a relatively recent innovation.
So neuroeconomics provides us with both the understanding of neural mechanisms underlying economic decision making, and also assistance with psychological and neuroscientific theory.
Behavioural economics has demonstrated that humans don’t always work in the ways that economic theory would predict; we cannot adopt a utility approach to defining behaviour. A more realistic approach is to deconstruct the way we act into what drives a particular behaviour for a specific individual. This goes against the economic model that assumes all individuals behave the same way based on the same trigger event.
In economic and marketing terms, consumption is highly personalised. There is not generalised solution or pattern that can be used to predict the future. In the course of evolution, humans have developed the prefrontal cortex, the part of the brain that helps us think and plan for the future. It is what delivers our decisions. But it does not drive behaviour or decisions alone.
Another part of the brain, the reptilian brain has not developed at the same evolutionary rate. It continually strives to protect us from making the wrong decision – invoking the fight or flight response. In crisis situations, this older part of the brain continues to serve us well, but it does significantly interfere with the newer neocortex regions. The result is that it confuses us as to when to rely on which part of the brain, in which circumstances. Considering that most of us don’t consciously stop and think about which part of the brain we are currently engaging, this can lead to suboptimal decisions and results. And this is exactly why I believe that we need to invest a little bit of time into understanding our basic brain functioning.
Enter the limbic system
There is one other part of the brain that can help guide us – the limbic system. This is the area of the brain largely responsible for picking up electrical signal from the body and processing these as emotions, which in turn are manifested in the body as ‘feelings’. So the brain picks up these signals before we feel them. When we understand this, we realise how valuable these signal are, and how they can help us interpret how our brain is responding, and why in many instances our first impulsive decision needs to be interrogated. Obviously, if we have a tiger chasing us we are not going to stop and do a body scan for emotions and regulate our response – we know to trust our limbic system to run. However, if an event triggers emotions of stress or anger, if we stop momentarily and understand that our initial response is being driven by the reptilian brain – to fight or flight – in many cases we will find that the outcome of that initial response it not going to deliver the optimal outcome.
It is the mechanisms behind these ‘regulated decisions’ that is the fascinating field of neuro-economics.
The spin off in learning to understand our own responses, is that we gain invaluable insight into the decisions and responses of others. This is beneficial in working with others, in negotiating with others, and in engaging others in communications.
Functional MRI
It is only since the introduction of the functional MRI [fMRI] that many of the neuroeconomic processes have been captured. fMRI allows neuroscientists to watch, in close to real time, what is happening in someone’s brain whilst they’re performing some mental task. This has led to the debunking of many previous psychological, economic and behavioural theories.
When our emotions are not aroused, we can happily rely on our rational choices. However, in states of heightened emotion, behaviour is not as aligned with standard economic theory. Emotionally driven decisions can be both rational and irrational.
When we recognise that we make both deliberate and emotional decisions, we can expand our field of focus into both conscious and unconscious decision making.
What are the differences between deliberate and emotional decisions?
Emotions are quick, immediate reactions triggered either through biological or cultural evolution. They are designed to drive quick and efficient responses to moments of threat. You react then think about it later. This is a rational response. Deliberation defines more methodical, careful thought around complex scenarios. It takes time to form the most appropriate response. Each type of decision has its role in our lives – so to predict how we will react in various potential situations can be very difficult. We may think we will perform in a planned, deliberate manner, but those of you who have experienced stage fright or been ‘stricken’ with terror will attest to how rapidly emotions can derail those plans.
So in this sense certain leadership and management concepts based on the economic model are more of a myth, relevant to only certain types of our functioning. We need a greater understanding of what brain mechanisms and factors are driving us as individuals.
So where to now with neuroeconomics?
The brain is overwhelmingly complex; and will likely prove one of the most ardent challenges scientists have ever faced. It will be a long path to ‘replicate’ it in cognitive technology. However, there will be many ‘side products’ along that pathway that can enhance brain function, or can restore damaged brain mechanisms.
As yet, we cannot predict what these side products will be and when they will likely be available. However, we can say that we can expect it to be decades away. Already, 25 years have passed since Star Trek physician Bones said, “Put him in the scanner and let’s see what he’s thinking”. We can now do exactly that – see what is happening in the brain when people are thinking!
How has Insight Mastery applied neuroeconomics?
Neuroeconomics forms the foundation of many of the executive and leadership programs developed by Insight Mastery. For instance, its flagship program EQ Leadership relies heavily on neuroscience to help leaders understand why they make the decisions they do, and how their unconscious bias and emotions disrupt optimal decision making and behaviour. In turn, this has helped us guide leaders as to the easiest and more effective ways to develop more confidence, gain more influence, communicate more effectively, build better relationships, build resilience against stress and time, and deliver better results in many other leadership activities.