Decisions, Decisions…

I came across a most interesting article the other day about the burgeoning field of neuroeconomics, written by Robert Shiller. Researchers are attempting to use neuroscience to see how the brain makes economic decisions. Modern economic theory, on the other hand, is based upon the assumption that people are rational and make decisions that will maximize their utility. Rational? Seriously? Have you seen people? Let’s just take the recent events of Black Friday as an example, with the pepper spraying, shooting, and soccer-game-esque riots over bath towels. And what about the market? There’s a reason they call the VIX the “fear index.” As somebody with a background in hard science, I’ve always thought calling economics a ‘science’ is a bit of a stretch. How can you quantify behavior and emotion and all the myriad ways that a person or group of people will respond to a particular situation, when every situation is different? It’s not like testing the boiling point of water or the specific gravity of lead where the answer is always the same.

Neuroscientists are making headway into understanding brain function and the biological structures underlying thought processes, and recently have been collaborating with economists and psychologists to see if a there is a physical basis for economic decision making. Finally, something I can get on board with! Though still in the early stages, I think this is an interdisciplinary field that bears watching. It’s certainly popping up in universities all over the country – if I had to do it again, I’d consider enrolling. I have a recurring dream that I never actually graduated from college, and I’m back on campus to complete my credits. Maybe I can work in a way to study some neuroeconomics while I’m at it. In my dreams, right?

Sarah DerGarabedian, CFA

Director of Research

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