Neuroeconomics

Economics may be "the dismal science," but as science goes, it's as soft and ideological a science as any of the other social sciences, despite using lots and lots of numbers. Almost every economic model rests on the assumption of individuals as rational decision-makers, when even a cursory examination shows that we mangy apes exhibit all manner of irrational behavior. To explain that, some economists are trying to build a bridge between the fields of economics and neurology.

By linking economic behavior to brain activity, however, neuroeconomics may finally supply the model that knocks mainstream economics off its throne. The new theory should fit better with reality, but it won't be as mathematically clean -- because the brain is a confusing place, with different parts handling different jobs. Says Camerer: "You are forced to think about a brain which has many somewhat modular circuits."

One of the most fruitful avenues of neuro research is "time inconsistency." When people decide about the distant future, they're roughly as rational as economic textbooks assume. But when faced with a choice of whether to consume something now or delay gratification, they can be as impulsive as chimps. Harvard's Laibson coined "quasi-hyperbolic discounting" to describe the behavior, but that was just a label, not an explanation.

So Laibson and others scanned people inside MRI machines and discovered two parts of the brain operating in radically different ways. For decisions about the far-off future, the prefrontal cortex takes a long-term perspective. But for decisions such as whether to buy another chocolate bar right now, the limbic system takes over and demands immediate gratification.

Interesting approach. I doubt it will help much in determining the CPI or predicting market failures, but there must be a thousand dissertations to be written on it.