Neuroeconomics and Methodological Individualism
| 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.