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Neuro-Economics?
Enter the Neuro-Economists: Why Do Investors Do What They Do?
By TYLER COWEN
Published: April 20, 2006LAS VEGAS uses flashing lights and ringing bells to create an illusion of reward and to encourage risk taking. Insurance company offices present a more somber mood to remind us of our mortality. Every marketer knows that context and presentation influence our decisions.
For the first time, economists are studying these phenomena scientifically. The economists are using a new technology that allows them to trace the activity of neurons inside the brain and thereby study how emotions influence our choices, including economic choices like gambles and investments.
For instance, when humans are in a “positive arousal state,” they think about prospective benefits and enjoy the feeling of risk. All of us are familiar with the giddy excitement that accompanies a triumph. Camelia Kuhnen and Brian Knutson, two researchers at Stanford University, have found that people are more likely to take a foolish risk when their brains show this kind of activation.
But when people think about costs, they use different brain modules and become more anxious. They play it too safe, at least in the laboratory. Furthermore, people are especially afraid of ambiguous risks with unknown odds. This may help explain why so many investors are reluctant to seek out foreign stock markets, even when they could diversify their portfolios at low cost.
If one truth shines through, it is that people are not consistent or fully rational decision makers. Peter L. Bossaerts, an economics professor at the California Institute of Technology, has found that brains assess risk and return separately, rather than making a single calculation of what economists call expected utility.
Researchers can see on the screen how people compartmentalize their choices into different parts of their brains. This may not always sound like economics but neuro-economists start with the insight — borrowed from the economist Friedrich Hayek — that resources are scarce within the brain and must be allocated to competing uses. Whether in economies or brains, well-functioning systems should not be expected to exhibit centralized command and control.
Neuro-economics is just getting started. The first major empirical paper was published in 2001 by Kevin McCabe, Daniel Houser, Lee Ryan, Vernon Smith and Theodore Trouard, all economics professors. (Professors McCabe, Houser and Smith are colleagues of mine at George Mason University.) A neuro-economics laboratory at Cal Tech, led by Colin F. Camerer, a math prodigy and now an economics professor, has assembled the foremost group of interdisciplinary researchers. Many of the early entrants, who have learned neurology as well as economics, continue to dominate the field.
Investors are becoming interested in the money-making potential of these ideas. Imagine training traders to set their emotions aside or testing their objectivity in advance with brain scans. Futuristic devices might monitor their emotions on the trading floor or in a bargaining session and instruct them how to compensate for possible mistakes.
Are the best traders most adept at reading the minds of others? Or is trading skill correlated with traits like the ability to calculate and ignore the surrounding caldron of human emotions?
More ambitiously, future research may try to determine when a short-term price bubble will collapse. Does the market tide turn when people stop smiling, adjust to their adrenalin levels or make different kinds of eye contact? [...]
Tyler Cowen is a professor of economics at George Mason University and is co-author of a blog, http://www.marginalrevolution.com.
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pierre
Agricultural subsidies
Nov 8th 2007
From The Economist print editionAlmost $268 billion was paid last year in subsidies to farmers in the 30 mainly rich countries of the OECD, down from $281 billion in 2005. This huge support, both directly from taxpayers and indirectly through higher prices paid by consumers, fell from 29% of total farm receipts to 27%. The drop was mainly because of higher world food prices, which reduced the need to prop up domestic prices, rather than changes in policy. Even so, crop and livestock prices in OECD countries were on average 21% higher than world market prices in 2006. The level of support varied widely, from 1% of farm receipts in New Zealand to more than 60% in Switzerland. In America it amounted to 11%, whereas in the EU it came to 32%.
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pierre
Des Chinois gourmands mais pas pressés
Isabelle Pernot du Breuil
Les Échos – Intelligence économiqueEn 2006, l’ensemble des fusions et acquisitions en Europe a mobilisé environ 1.500 milliards de dollars. A la même époque, les réserves de change accumulées par la Banque Nationale de Chine ont franchi le seuil des 1.000 milliards de dollars. Si elle l’avait voulu, la Banque de Chine aurait donc pu acheter les deux tiers de toutes les entreprises qui ont été vendues en Europe. On calcule de la même façon, que le montant des réserves chinoises correspond à peu près à la capitalisation boursière des trois principales firmes américaines : Exxon Mobil, General Electric et Microsoft. De là à redouter une offensive sur les joyaux de la couronne occidentale, il n’y a qu’un pas. A ne pas franchir.
Les Chinois nourrissent des rêves de revanche mais ne peuvent avoir envie d’asséner des coups qui, dans l’état actuel des choses, provoqueraient de sévères représailles. Leur puissance doit avancer masquée et leur emprise s’imposer pas à pas. Pas question, pour l’instant, d’attaquer, en Amérique et en Europe, les plus grosses entreprises. Mieux vaut conquérir des parts de marché en leur achetant des filiales. Mieux vaut surtout, avaler des entreprises moyennes à fort contenu technologique. Pour s’en convaincre, il faut voir comment la Chine s’approche de l’Europe en suivant les pointillés des anciennes républiques soviétiques ou étudier comment elle fait main basse sur l’Amérique du Sud et l’Afrique dans sa quête vitale des ressources minérales et énergétiques. Elle devra aussi apprendre à donner des garanties de bonne gouvernance.
En économie, comme à table, l’appétit vient en mangeant. Inutile d’être glouton.
My two cents: Merci Merci Merci! Ça nous change du “La Chine c’est des méchants, ils vont tous racheter, bla bla bla”
WiknaBiz 8.26am on November 10, 2007 Permalink
Les Chinois nourrissent des rêves de revanche mais ne peuvent avoir envie d’asséner des coups qui,