Neuroeconomics: The science behind decision making

Imagine you are standing in the supermarket pondering the choice between two brands of biscuits. In any case, this shouldn’t be a big problem because you’ll choose the one that tastes best, or if you want to be economical, you’ll choose the one that is less expensive. But inside this seemingly inconsequential choice lies a lattice of intricate neural processes that neuroeconomics—the field of intersection of neuroscience, economics, and psychology—has been working to unravel.

For more than decades, human choices were thought to be solely influenced by self-interest, curiosity, and the desire to maximize benefit, as explained by traditional theory of economics. In another way, it was inferred that human beings are rational; it is anything but. Today, the field of neuroeconomics is emerging to explain how the brain responds to decision-making and how that mechanism occurs. How can the two completely different fields—Neuroscience and Economics—intersect, and what does that intersecting point imply? This article tries to explain this phenomenon.

What happens in the brain when we try to make a decision?

Understanding the structure and function of the brain is one of the most perplexing yet intriguing aspects of modern science. While most people know the general functions of the brain: memory, balance, perceptions, emotions, personality, and so on, very few people understand how the decision-making process happens in the brain, ranging from simpler customer choices to stupendous financial investments. The emergence of tools such as electroencephalography (EEG), magnetoencephalography (MEG), magnetic resonance imaging (MRI), positron emission tomography (PET), and functional near-infrared spectroscopy (fNIRS) provides crucial information about what happens in the brain when we make decisions. The discovery of the brain’s reward system props up our understanding along with these tools. Studies have found that the parts of the brain—the ventromedial prefrontal cortex (vmPFC) and the striatum—play crucial roles in decision-making. When making decisions, the ventromedial prefrontal cortex (vmPFC) helps evaluate and integrate various factors, such as costs and benefits. The striatum signals the brain’s expectation of reward, influencing whether we perceive the choice as satisfying or not. The perfect balance between these organs is what decision-making is about.

What drives us to make choices that align with our best interests, and why do we sometimes make decisions that go against them?

There is one famous theory behind its science called ‘reward error prediction theory’, which explains how the brain reacts when our expectations fall short or when our expectations exceed. It says that if we expected the profit from the investment, but unfortunately if we didn’t get it, the brain sends the negative signal. Conversely, when we receive a reward, i.e., our expectations meet or exceed, the brain releases a large amount of dopamine—a neurotransmitter linked with pleasure and reward—motivating us to make riskier or emotionally attacked decisions, such as buying luxury items despite having little money or chasing a stock market on high stakes.

What role do emotions play in decision-making?

Traditional economic theories treated the emotions as unwanted distractions; however, the emergence of neuroeconomics says that emotions play a huge role in the decision-making process. There is a peanut-sized organ called the amygdala on our brain whose functions are 100 times superior to its size, as it is the major processing center of emotions. For example, if you fear loss, the amygdala is triggered, and it stops you from making risky decisions. In one of the neuroeconomic studies, the participants were given the option of choosing between guaranteed small payouts and unguaranteed large payouts. Brain scans revealed that when participants chose guaranteed payouts, amygdala was more active. This explains the extent to which emotions play a role in decision-making, which looks miniscule but is, in reality, a much more complex phenomenon.

Why is the knowledge of neuroeconomics important among Nepali people and leaders?

Though not a single university in Nepal has neuroeconomics as their education program, it is fundamental to understand the concept of neuroeconomics in the context of Nepal. It is quite straightforward that many Nepalese people prioritize short-term benefits over long-term investments, like education and entrepreneurship. Understanding neuroeconomics can explain why people prioritize short-term benefits. In addition to this, Nepal has a plethora of breathtakingly rural parts, particularly in the midwestern and hilly areas. In such areas, decision-making is heavily influenced by traditions, social cohesion, and emotions; expanding the concept of neuroeconomics can increase the financial literacy among such groups of people. Today, the trend of involvement in the financial stock market is increasing among Nepali people. The neuroeconomics can explain why some people take unnecessary risks and why some people don’t. It can also explain why many Nepalese leaders are emotionally driven in implementing large financial-based projects and how it has affected the country’s economy.

Although neuroeconomics is still a young study, it has contributed much to economic theory and psychology. By expanding the knowledge of neural mechanisms on decision-making, simple or complex, it has explained behavioral choices, investment ideas, and financial-based policy. From cognitive biases to error prediction theory, and from the brain reward system to the amygdala's role on emotions, neuroeconomics offers new insights in the fields of cognitive science, psychology, and economics, which in the near future could explain everything from public policy to international relations. As a country navigating through economic disparities and financial illiteracy, neuroeconomics can certainly increase the financial literacy at the individual and national level and can also help the government make more rational policy. 

Ashish Banjara

St Xavier’s College, Maitighar