Neuroeconomics and Methodological Individualism

17 April 2010 at 2:47 pm 8 comments

| Peter Klein |

Methodological individualists, following Schumpeter (1908), hold that aggregates like firms, societies, nations, etc. should be modeled as organizations or ecosystems composed of smaller decision-making units. But the reduction has to stop somewhere — it can’t be turtles all the way down (the Matrix-within-the-Matrix problem). Economists typically define the individual actor as the relevant unit of analysis; we don’t go further down to the level of, say, the gene (see Nicolai’s earlier discussion of the “driver’s seat fallacy”).

Neuroeconomics — the latest advance of the behavioralist revolution — rejects the conventional perspective, however. Isabelle Brocas and Juan Carrillo conclude their recent useful summary of neuroeconomic research by likening individuals to organizations:

Neuroeconomic theory will soon play a crucial role in the building of new reliable theories capable of explaining and predicting individual behaviour and strategic choices. The main message is that the individual is not one coherent body. The brain is a multi-system entity (with conflicting objectives, restricted information, etc.) and therefore the decision-maker must be modelled as an organisation. We conclude with an analogy. Before the so-called modern theory of the firm, organisations were modelled as individual players characterised by an input-output production function. The systematic study of interactions between agents and decision processes within organisations (acknowledging informational asymmetries, incentive problems, restricted communications channels, hierarchical structures, etc.) led to novel economic insights. Applying a similar methodology to study individual decision-making is, in our view, the most fruitful way to understand the bounds of rationality.

Hmmm, I admit that my brain often has trouble motivating other parts of my body to achieve the brain’s objectives, but I’ve never thought of these as agency costs. And I suppose that leprosy — in which the nervous system fails to communicate information about damage to bodily extremities to the brain – could be described as a failure to make effective use of dispersed specific knowledge. But I don’t quite see the value added.

More generally, my own view is that neuroeconomics represents a potentially interesting branch of applied psychology, but has little to do with economics per se. Economics is about the logical relationships between means and ends, not the psychology of preferences and beliefs. But mine is a minority view.

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IRB Flames Quoted in the WSJ, Kinda Sorta

8 Comments Add your own

  • 1. Rafe  |  17 April 2010 at 5:42 pm

    The neurosciences will shed light on individual events like the brain explosion of an investor or a quarterback but they have nothing to say about the situational analysis involved in praxeology and the explanation of the unintended consequences of human actions which is a major task of the social sciences.

  • 2. Rafe  |  17 April 2010 at 7:13 pm

    Interesting comment on behavioural economics

    http://catallaxyfiles.com/2010/04/17/behavioural-economists-and-tyrants/

  • 3. FC  |  19 April 2010 at 3:57 am

    Yeah, I can understand why economists would want to borrow from physics but psychology is infamously full of nonsense. The recent paper on brain scans of dead fish really should put an end to neuroeconomics.

  • 4. srp  |  19 April 2010 at 4:10 am

    I actually think the neuroeconomics approach of identifying localized parts of the brain with different “agents” is a step back for psychology as well as economics. It’s just putting a bunch of homunculi in there. Id, ego, superego, new and improved by brainscans!

    The interesting approach to me goes the other way: applying economics to psychology. Paul Grimlich’s book on neuroeconomics shows that chimpanzee brains and human brains appear to follow various optimization strategies, including pursuit of mixed-strategy Nash equilibrium.

  • 5. Ty  |  19 April 2010 at 11:53 am

    Humans are just a useful fiction, really just a nexus of cells…

  • 6. Peter Klein  |  19 April 2010 at 11:56 am

    Ty, do you think the choice between childbearing and adoption can be explained in terms of asset specificity?

  • 7. Recomendaciones « intelib  |  21 April 2010 at 2:29 pm

    [...] Neuroeconomics and Methodological Individualism, by Peter Klein Neuroeconomic theory will soon play a crucial role in the building of new reliable theories capable of explaining and predicting individual behaviour and strategic choices. The main message is that the individual is not one coherent body. The brain is a multi-system entity (with conflicting objectives, restricted information, etc.) and therefore the decision-maker must be modelled as an organisation. We conclude with an analogy. Before the so-called modern theory of the firm, organisations were modelled as individual players characterised by an input-output production function. The systematic study of interactions between agents and decision processes within organisations (acknowledging informational asymmetries, incentive problems, restricted communications channels, hierarchical structures, etc.) led to novel economic insights. Applying a similar methodology to study individual decision-making is, in our view, the most fruitful way to understand the bounds of rationality. [...]

  • 8. David Hoopes  |  22 April 2010 at 10:28 pm

    Nice Ty!

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