Neuroeconomics: Biotech Meets Economics

grimiore1 writes "The Economist has a story today introducing the concept of Neuroeconomics, which uses brain scanning technology and neuroscience to create new economic models and theories."

Comments

assumption of risk-neutrality

[techstep]

FTA: Traditional economists had long thought--or assumed--that the prospect of a $1,000 gain could compensate you for an equally likely loss of the same size.

Well...it depends. That statement assumes that a person has preferences described by a risk-neutral utility function (for example, a linear function). In that case the utility a $1000 gain would fully compensate for the decline of utility from a $1000 loss.

However, people can also be risk-averse (in which case the loss in utility from being out $1000 would be greater than the gain from receiving $1000) or risk-loving (in which case the opposite situation happens). Further, they can be any of those within particular intervals. It's generally accepted that not all agents are risk-neutral (though it does make some models easier to build).

Re:gah..

[Frymaster]

More importantly, free market exchanges are win-win scenarios.

well, there's a bit of a dramatic oversimplification...

while it is potentially true that free market exchanges benefit the two consenting parties (although this is not always the case, especially where highly inelastic goods and services are involved. think: crack dealer) there is often a strong negative effect on non-consenting third parties.

these by-effects of free marketism are called "externalities". for those of you who slept through econ 220, the technical definition of an externality is "when the actions of one agent (in a free exchange) affect the interests of another agent other than by affecting prices".

the classic example of an externality as posited by milton friedman is that of the company with the smoke stack that dirties someone's shirt downwind. the owner of the shirt must pay for its cleaning and that cost is not borne by the factory owner. it's freebie. we've see a lot of externalities in the modern "free market" economy, the most obvious ones being environmental: ie, the chemical company that dumps its waste into the river for "free".

of course there are tonnes of other externalities in the modern economy. the wiki page on it is here but you'll need to have been awake for econn 220 to grok it.

bottom line: saying that a free market transaction benefits both parties is an oversimplification and does nothing to contribute to a meaningful debate on economics.