Neuroeconomics and Behavior: How Cognitive Science Influences Policy

By Mikhial Khan

Craig Fox (top), Colin Camerer

Last week, during the second session of the Luskin Neuroscience and Society Conference, UCLA Anderson Professor Craig Fox and Caltech’s Dr. Colin Camerer made a collaborative presentation titled Behavioral Policy and Neuroeconomics. Fox, who holds a joint appointment in UCLA’s psychology department and the David Geffen School of Medicine, is the founding co-editor of the forthcoming journal Behavioral Science and Policy. Award-wining researcher Camerer is the Robert Kirby Professor of Behavioral Finance and Economics at California Institute of Technology and is an American Academy of Arts and Science Fellow. Fox and Camerer’s presentation highlighted examples of behavioral experiments and neuroimaging that demonstrate how the field of cognitive science is applicable in business when it comes to making optimal decisions.

The question Fox posed to the audience was, “What can policy learn from neuroeconomics?” He explained how “individuals” look to maximize financial or individual incentives for their own self-interest in the workplace. Employers are trying to find innovative methods to track their employees’ behaviors to reach company goals as a team and maintain a stable work environment. Fox, whose research is based on how people make judgments and decisions under conditions of risk, uncertainty and ambiguity, explained that behaviors could be irrational: the mind tries to make mental shortcuts instead of following the “correct” procedures. Fox insisted that the “Behavior Policy” model increases workers’ performance more measurably than the “Neoclassical” format that, broadly, only gives employees incentive, information and controls regulations. The behavior policy primes employers to give their employees social incentives for outstanding performance and to keep an active work environment to keep employees tolerant of office regulations.

Camerer showed the audience physical evidence of individuals’ behavior in neuroeconomics. In his research, Camerer has been locating areas in the brain that show strong signs of activity when business professionals are making optimal or insignificant financial decisions. He presented an experiment that was conducted with 20 stock traders and examined their brain activity while buying and selling shares in the context of a stock bubble. The use of neuroimaging showed the location in the brain that became active when traders made an instinctive decision before the bubble hit. Camerer pointed out that the insular cortex demonstrated high brain activity among the stock traders that profited from the bubble, whom he called “forward lookers.” He said this research can advance economic practices by understanding the behavior and instincts of successful traders.

Camerer believes the field of neuroeconomics could be highly instructive and applicable if we could examine the brain activity of politicians or that of entrepreneurs like Warren Buffett. He and Fox emphasized that the potential to use these studies in the finance world is in our future but much more research is needed.