This post is in response to Neuroeconomics Explained, Part One by Paul J. Zak

Game theory is a branch of mathematics that describes how to make choices involving other people who are also making decisions. Game theory can describe how best to make chess moves, how to negotiate an employment contract, and how to make myriad other decisions involving other people. Many game theoretic models have choices that are cooperative (sharing benefits) and choices that are selfish (hoarding benefits). Understanding why people choose to cooperate or to be selfish is vitally important because it is not possible to live in a free society unless people choose to behave cooperatively with others most of the time, even when they are not being monitored by the government.

Unfortunately, many game theoretic models do not predict behavior very accurately. For example, consider a set of choices known as the "Ultimatum Game." Suppose you were given $100 and ask to propose some split of it to another person in a different room. No communication with this person is allowed, and you will never meet him or her. The other person knows that you were given $100 and that you have to propose a split of the money. Here's the catch: if the other person accepts your proposal you both get paid, but he or she rejects it, you both get nothing. What would you do? Standard game theoretic models predict that any offer, no matter how small, will be accepted, since some money is always preferable to nothing. However, in most developed countries, offers of $20 or less are nearly always rejected. Neuroeconomics experiments have shown why. Stringy offers produce strong activation in the interior insula, suggesting that low offers are rejected because people are disgusted by them. Human brains have evolved for social interactions, and it was typically better to lose some resources to punish a stingy person than to build a reputation for being exploitable. On the other hand, why would anyone ever make an offer in the Ultimatum Game that is generous, that is, larger than needed to be accepted? Neuroeconomists thought that empathy toward others might drive people to be generous. They tested this by giving people more of a brain chemical called oxytocin that increases empathic behaviors. Infusing oxytocin into people's brains using a nasal spray increased generosity to a stranger in the Ultimatum Game by 80%. This shows that people are generous because they emotionally identify with others.

Trust. The role of oxytocin in decisions to trust a stranger with one's money has also been studied by neuroeconomists. Any transaction that occurs over time, like a financial investment, has a degree of trust embedded in it since there are no perfectly enforceable contracts. Indeed, the general level of trust among people in a country is among the strongest predictors of which countries will have rising standards of living: high-trust countries see rapid increases in incomes. But, an open question is: Why would you ever trust a stranger with your hard-earned money? If someone shows that he or she trusts you by investing money with you, neuroeconomics studies have found that the receiver's brain releases oxytocin. In addition, the more oxytocin released by people's brains, the more they returned some of the invested money (which typically earns a large return) to the trustee. This is surprising because, in these experiments, there is no obligation to return any money at all. To prove that brains use oxytocin to help determine whom to trust, neuroeconomists have infused oxytocin into the human brain. When this is done, more than twice as many people show maximal trust in a stranger by sending that stranger all their money. The neuroeconomists' findings on generosity and trust present a conundrum for traditional economics: trustworthy people (typically more than 90% of people studied) could have kept all the money they controlled for themselves. Instead, these people freely chose to return often a large proportion of the money to the person who initially trusted them. Why? Recent brain imaging experiments have shown that monetary transfers to another person indicating trust activate regions in the brain that reinforce behaviors by making them pleasurable. This brain reward circuit prominently uses the neurotransmitter dopamine. Because humans are social creatures, our brains have evolved to make cooperative behaviors, including trust, rewarding. Brain imaging studies have shown that even donating money to charity appears to activate brain regions associated with empathy (through oxytocin) and reward (through dopamine). These studies also reveal the importance of emotions when making economic decisions.

Punishment. What happens when someone betrays your trust? If you are like most people, you don't like this at all, and you want to let the other person know it. When people are given the chance to spend some of their own money to punish another person for betrayal, they readily do so. Costly punishment occurs even if the individuals involved will not interact with each other again. This has been called moralistic punishment. Physiologically, when one is betrayed, testosterone, a hormone associated with aggression, spikes. The act of punishment also activates dopaminergic reward regions of the brain. Individuals punish because they are angry, and they find it rewarding to punish betrayers-even at a cost to themselves. The threat of punishment is an important mechanism that sustains cooperative behaviors, even among those who might consider being selfish.

Outlook. Rather than the classical view of humans as "homo economicus" (purely rational and self-interested), research in neuroeconomics suggests that humans could more appropriately be called "homo reciprocans" --reciprocating creatures who are influenced by emotion. These early but important neuroeconomics studies indicate that the human brain is wired to evaluate the utility of options and extract economic value from social interactions. While neuroeconomics is a new field, it holds the promise to improve the ability to understand one's own choices, to better predict the choices of friends and customers, and to guide government policy. Neuroeconomics studies also allow scientists to help those who make poor choices, including criminals, those with psychiatric disorders, and those under extreme stress, such as soldiers.

This article was taken from an entry I wrote for the McGraw-Hill Yearbook of Science & Technology 2009.

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