Neuroeconomics

Trust Games

To trust someone implies taking some risk. To be trustworthy implies that you will try to reduce risks to those who trust you even if it is costly to you to do so. For economists trust reduces the transaction cost of trading. In,

Berg, Joyce, John Dickhaut, and Kevin McCabe, "Trust, Reciprocity, and Social History," Games and Economic Behavior, (10)1995, pp. 122-142,

We designed an experiment to study individuals' propensity to be trusting and to be trustworthy in a task we call the investment game. In this game two subjects are each given $10 as a show up fee. One of the subjects is told that he or she will be decision maker one (DM1), and can send any amount (all, none, or some) of the $10 to the other subject (decision maker two, DM2). The rules are simple. Every dollar sent will be tripled by the experimenter before it reaches DM2, who then gets to decide how much of the tripled money to keep and how much to send back to DM1. After DM2’s decision the game is over and subjects leave. We designed the experiment so it was double-blind meaning that neither the subjects, nor the experimenter, new who was matched together, or what subject made what decision. Game theory predicts that as long as DM2 prefers more money to less, DM2 should keep all the money that is sent. Of course, DM1 should then send nothing. But this is now what happened. On average DM1’s send over $5 and roughly one third of the DM2’s reciprocated by sending back more than was originally sent even though the double-blind condition implied no one would know what DM2 really did.

Imaging Emotion and Cognitive Control in the Ultimatum Game

In their recent paper in Nature,

Sanfey AG, Rilling JK, Aronson JA, Nystrom LE & Cohen JD (2003). The neural basis of economic decision making in the ultimatum game. Science, 300, 1755-1757,

find that the anterior insula of second movers shows a greater bold response (or more activity) as offers (from first movers) become more unequal. Since the anterior insula is active for some emotions such as disgust this result helps explain why second movers reject unequal offers. The authors go on to show that the decision to accept an unequal offer requires greater relative activation in dorsolateral prefrontal cortex (DLPC). Since DLPC is thought to play a role in maintaining cognitive control, for example, between acting on one’s disgust, and getting more money, this result help explains the cognitive conflict created in the ultimatum game.
One question that remains open is whether or not this cognitive conflict is moderated by social context. In a series of economic experiments,

Elizabeth Hoffman, Kevin McCabe, Keith Shachat, and Vernon Smith, "Preferences, Property Rights, and Anonymity in Bargaining Games," with Games and Economic Behavior, (7)1994, pp. 346-380,

We found that as you changed the exchange context between first and second movers that first movers would ask for increasingly unequal offers and that the second movers would continue to accept at the same rate. Does this mean that changing the context makes an unequal offer less disgusting, or that it is easier for subject to resolve the cognitive conflict in favor of keeping the money?

What is the Ultimatum Game?

Take two people and tell them they have the opportunity to split $10. Furthermore, tell one person that, as first mover, they get to make a one time offer, and tell the other person that, as second mover, they get the opportunity to either accept or reject this offer. If the offer is rejected they both go home with zero. This stylized negotiation was first studied by experimental economists in

Güth, Werner, Rolf Schmittberger, and Bernd Schwarze (1982) “An Experimental Analysis of Ultimatum Bargaining,” Journal of Economic Behavior and Organization, 3:4 (December), 367-388.

and economists got a surprise. Game theory predicts an unequal split favoring the person who gets to make the offer. After all if I offer a ($9, $1) split where you only get $1 you should take it since a dollar is better than nothing, but instead a majority of the offers are to split equally. Not a bad strategy if your partner is willing to reject unequal offers, and sometimes they do, but not all that often in the one-shot case. Can fear of rejection explain the equal split offers? To answer this question

R. Forsythe, J. Horowitz, N.E. Savin and M. Sefton, Fairness in Simple Bargaining Experiments," Games and Economic Behavior, 6, 1994, 347-369.

compare offers in the ultimatum game with offers in a simpler game called the dictator game. In the dictator game, the players who make the offers get to keep their share no matter what. Sure enough they make less equal offers, and keep more of the $10. Interesting, unlike the female capuchins in Sarah Brosnan and Frans de Waal’s study second movers always accepted their unequal monetary shares when it came time to collect in the dictator games, but by then first movers were long gone.

Imaging Two-Person Exchange

Trade occurs in two stages, sometimes implicit, but often explicit. In the first stage the terms of trade are agreed upon. In the second stage the terms are carried out. These two stages can be separated and studied separately as ultimatum games and trust games. Exchange can break down either in stage one, because offers are two selfish, or in stage two because one or both sides fail to execute. In our paper,

McCabe, Kevin, Daniel Houser, Lee Ryan, Vernon Smith, and Theodore Trouard, “A Functional Imaging Study of Cooperation in Two-Person Reciprocal Exchange,” with Proceedings of the National Academy of Sciences, (98)2001, pp. 11832-11835,

we used functional magnetic resonance imaging to infer brain activity as these two stages were played by human (compared to computer) players. We found that reciprocal behavior between humans was correlated with bold responses (indirect measures of regional brain activity) in frontal areas of the brain consistent with the interpretation that subjects were inferring cooperative intentions by their counterparts, and from these inferences delaying immediate gratification in favor of longer term mutual gains.

Inequality Aversion in Monkeys?

Sarah Brosnan and Frans de Waal have a new article in Nature, i.e., Monkeys reject unequal pay, (425) pp. 297-299, where female capuchin monkeys were trained to hand the experimenter a small granite rock for which they then received a slice of cucumber. Monkeys did the task in pairs, but were separated by mesh screens where they could see the reward each would receive. The experimenter then changed the rules so that one monkey got cucumber while the other got a grape (a preferred reward). In this condition the monkey getting cucumber observed that the other monkey got a grape and often (over 50%) of the time would then refuse to hand over the token, or would refuse to eat the cucumber. Has the utility for cucumber fallen? Or, is the monkey trying to influence the experimenter to get a grape? Also look at newsweeks coverage.

Neuroeconomics Conference

Gregory Berns just hosted a Neuroeoconomics conference at Martha's Vineyard. With both neuroscientists and economists in attendance there were a number of presentations of interdisciplinary research that will soon be submitted for peer review. Throughout the conference two main questions were the focus of much discussion. How will economics influence neuroscience? Here the main consensus seems to be in the application of models of choice and decentralized exchange to brain function. Also, how will neuroscience influence economics? This question seemed to have less consensus, but one view suggested by a number of participants was that neuroscience lets us see economic decision making as a nexus of competing interests inside the individual, and that this competition results in heterogeneity in individual behavior that once understood will likely influence the way we think about economic policy.

Reciprocity and Social Order

In 1991, Douglass North published his book, Institutions, Institutional Change, and Economic Performance (Cambridge University Press). Having visited Doug as a post-doctoral fellow in ’86-‘87 at Washington University in St. Louis I had already started to incorporate his thinking on institutions, and institutional change into my own economic experiments, and Doug’s book helped me frame my own research on the natural tension between personal exchange, i.e., what I think our embodied brain is designed to do, and impersonal exchange, i.e., what we are capable of doing through our emergent institutions. Recently I was commissioned by USAID to write a paper that reviews many of the consequent experiments I’ve had the opportunity to run with many colleagues. This gave me the opportunity to distill some of the lessons learned and consider how new experiments could be designed to study institutional change. This paper is called, Reciprocity and Social Order: What do experiments tell us about economic growth?

Two good books.

A very nice introduction to cognitive neuroscience is Joseph LeDoux's book, The Synaptic Self. I particularly liked his chapters: Building the Brain, and The Mental Trilogy. The paperback edition is now under $12. Once you've read LeDoux's book Paul Glimcher's book, Decisions, Uncertainty, and the Brain: The Science of Neuroeconomics gives you a neuroscientist's view of Neuroeconomics. Both books can be read by anyone, but at the same time they don't sacrifice the science. Partly by offering a huge number of science journal references where the original science is published. Paul doesn't hold back on his criticisims of neuroscience and economics, neuroscience for leaving out cognition, and economics for leaving out the decision maker.

Neuroeconomics Explained

As Neuroeconomics gets started I've received a lot of email asking for an explanation. So here goes.

Neuroeconomics is an interdisciplinary research program with the goal of building a biological model of decision making in economic environments. Neuroeconomists ask, how does the embodied brain enable the mind (or groups of minds) to make economic decisions? By combining techniques from cognitive neuroscience and experimental economics we can now watch neural activity in real time, observe how this activity depends on the economic environment, and test hypotheses about how the emergent mind makes economic decisions. Neuroeconomics allows us to better understand both the wide range of heterogeneity in human behavior, and the role of institutions as ordered extensions of our minds.