Key Assumptions of Neuroeconomics, Global Financial Crisis and Neuroeconomics - Literature review Example

Abstract Neuroeconomics refers to the use of the different parts of the brain to explain economics components. Neuroeconomics states the combination of the ability of neurologists and economists to user each other’s experience to enhance service provision. The study has attempted to cover the different lobes of the brain that include frontal, parietal, occipital and temporal lobes that work in conjunction to ensure that the body activity respond to a situation. It has also outlined the use of neuroeconomics to curb the global financial crisis. Neuroeconomics has also discussed key neuroeconomics assumptions and how they differ from the standard economics theories. The study has also highlighted the importance of neuroeconomics in promoting sales in an organization. Table of Contents Abstract 1 Introduction 3 What is Neuroeconomics? 3 Interconnection of lobes of the human brain 4 Key assumptions of neuroeconomics 7 Global Financial Crisis and Neuroeconomics 9 The use of neuroeconomics to promote sales 10 Conclusion 12 List of References 13 Introduction What is Neuroeconomics? Neuroscience refers to the study of the brain with specific reference to behaviour. Psychology is defined as the scientific study of the mind and the way people behave, while economics aims to study principles of the way money, business and industry is organized. The combination of the three phenomena neuroscience, psychology and economics forms neuroeconomics. According to Camerer (2003) Neuroeconomics can therefore be referred as the aspect of using the brain to be able to solve complex economics issues and theories, which explains how much people save, why there are strikes are common among workers, it will therefore seek to explain several economics phenomena like why the prices of commodities is never constant, why some people save and how future market trends can be established among a number of issues. Gambling is one of the most common aspect that neuroeconomics seeks to study and achieve an explanation to a number of issues, that economics research have failed to explain in cognitive terms. For example how people end up valuing the idea of winning and losing in a gambling game, because there is always a possibility of either winning or losing. But after every win the winner will always celebrate not knowing there is a part of the brain that will seek to explain this appropriately. Also a region in the brain will be established for combining both the probability and hedonic sensations, therefore neuroeconomics would have proved much further what economics think is a simple model in gambling, and yet they cannot establish or explain it competently. The following figure show picture of two brains (adopted from google.com images on neuroeconomics): Powell Kendall states that the origin of neuroeconomics when researchers in both field of neural science and economic identified that using tools in both field might speed their work along. This was because one field could very well be used to explain the other therefore raising harmony and support especially for economics. Glimcher (2002) states that when the three elements of neuroeconomics (economics, psychology and neuroscience) are combined effectively. It will facilitate crucial information to economics and neuroscientist to work in collaboration to ensure that answers are provided in every situation in the fields. Which when solved appropriately will enhance best solutions especially in the field of economics. Interconnection of lobes of the human brain A lobe is a part of the brain that ensures effective communication is attained, and response is made appropriately. The brain is made up of four lobes that include; the lobes have been arranged from left to right as illustrated in the diagram below: a) Frontal b) Parietal c) Occipital d) Temporal The figure below shows the lobes of the brain. The above diagram of the lobs of the rain was adopted from about.com, and they are a courtesy of John A Beal, of Louisiana Health Sciences Centre Shreveport. The frontal lobe is responsible for reasoning and all activities that require effective planning. It gives an individual the ability to assess and weigh down options, including methods that would calculate costs and give view on the best options available. But when it is damaged it can increase risk-taking of individuals. Parietal region govern motor action. It is found at the middle of the brain. This action could be action of movement or answering a request using a body part. It includes the process of pressing a key to answer a related call, sensory information such as pressure, direct change of direction and any movement that enhances flow of information. If it is damaged it would lead to an increased problem with memory. Occipital lobe is where the visual processing occurs. It can be found at the back of the brain. It gives the user a picture of an event which has not yet occurred or is in the process of occurring. This could be through imagination to picture what might perhaps happen to an individual at a letter stage. If the lobe is damaged it can result to visual complications in individuals. Temporal lobe enhances remembrance, sensing the situation and feelings. It is the lobe that is located at the bottom of the brain. It facilitates an individual to interpret sound and language, which further helps in identifying both the negative and positive emotions relating to a particular aspect or occurrence. A negative aspect shows that something bad is going to happen therefore a response should be made immediately. When a situation is triggered to a person the frontal lobe will allow weighing down the options and identifying if it is of importance or ultimate concern. The occipital lobe will give the visual recognition of the whole situation. The temporal lobe will bring emotions if the end to this situation is not good, while the parietal lobe that governs motor action will make the person respond by either moving out or shouting. Therefore the stimuli are equally distributed to each lobe evenly after it has been coordinate by an adjacent lobe. From the example stated above the frontal is the locus of planning, reasoning, cognitive control and integration therefore it will help in guessing how the person is going to win. Also in the example above temporal lobe will be responsible for memory, recognition and pain; therefore it will bring down emotions of winning and losing, therefore giving the person ability to rejoice when he wins and mourn when he loses. Key assumptions of neuroeconomics Camerer, Loewenstein and Prelec (2004) discuss the various Key assumptions in neuroeconomics that include: 1. In order for every situation to be at equilibrium there is need for an ideal functioning or explanation for the same. For example a hungry person will always tend to move towards a hotel compared with a satisfied individual. This is because the hungry individual will need to consume food in order to feel at equilibrium, while the satisfied individual will visit the hotel when he feels hungry to be in a state of equilibrium. It similarly explains the market situation with supply and demand rising and falling 2. When you make judgment from a consumer choice, it does not bring an actual explanation to the situation. For example to boys can be given an offer to purchase a geometrical set at a cheaper price. They both might refuse the offer even though it is affordable. This maybe because they might have a geometrical set at home, or they might be done with geometry in school. But the inference made by the seller might assume that they are poor and therefore cannot afford the set. This seeks to answer questions as to whether the cortex is able to control brain processes effectively. This principle perhaps may be used to explain why shoppers buy too much food when they are hungry. Therefore also in economics it should therefore be known that not only monetary value facilitates the choices an individual makes but the brain plays a major role in it. 3. The four types of utilities cannot be brought together at all times. Neuroeconomics aims at finding a part of the brain that will enable people to show how choices are made in a market. According to Camerer, Loewenstein and Prelec (2004) Utilities cannot match if there production entailed different places or regions. For example an addict will always want to consume things which when he asked will say are not nice to be taken. This can be combined as wanting, choosing and experiencing for this particular drug addict. Compulsive shoppers will end up buying goods which they never use; this is because they might just want to test the communities. 4. People assume that having a lot of money means that one can purchase a lot of goods and services. But there is a part of the brain that is responsible for what people purchase or not purchase. For example might have money but refuse to purchase food maybe his need is inclined toward shelter, or any other need that his part of the brain wants. The example might explain why the wealthy individual will keep working even at the time that they should retire, although they have money. According to Loewenstein and Prelec (1998) rich people will also feel pain when paying for goods, so at times they might also refuse to buy and wait for prices of commodities to go down. 5. Assuming that the income of a particular person directly influences the type and amount of goods they purchase. , but neuroeconomics has found out that the midbrain recorded the highest amount of activity in the part called striatum if the money spent was earned rather than given. Therefore economist should come to agree that when people earn money the brain records more comfort, than when the same money is unearned. 6. Assuming that consumers understand the habit forming process of a commodity. A consumer will only form an addiction of a given commodity if he uses that particular community and finds it as interesting. This is not related to the consumer but the brain forms a habit to like that commodity. Therefore it is clear that habit forming processes and addiction are attributed in the brain. Global Financial Crisis and Neuroeconomics Yes. Neuroeconomics can be used to explain the issue of global financial crisis and even provide a means to curb financial crisis as it provides for better ways of identifying and alerting people on the risk involved some of the ways to be used to tame global financial crisis include the following. i. Helping to reduce the issue of gambling that has resulted to a number of people experiencing losses. As stated by National research Council (1999) about 1% of individuals who gamble are pathological- as the people loss control during gambling, they always get losses and harm their own work and personal relationships. As this is the first fact that renders people jobless as a result giving rise to the global financial crisis. Nevertheless neuroscience brings an attempt to explain and curb the vice of Global Financial, by identifying that a part of the brain can be controlled to reduce gambling. ii. Understanding the issue of risk and ambiguity using neuroeconomics can lead to more investment as a result explain and curb the global financial crisis because in most cases risk is related to end results. But since risk has more aspects that people cannot tell how and understand effectively. Business executive say risk is the loss, especially a large loss. LeDoux (1996) states that the amygadala is the part of brain that is responsible to trigger responses that shows risks identified by individuals. Since fear is related to issues such as investments, kidnapping, terrorism a clear understanding of the risks would encourage investments. iii. Neuroeconomics assist people to make choices by bringing the different utilities together. This is important to explain and provide a means to curb financial crisis since clear understanding of the utilities would enhance better choices of commodities limit unwanted spending and reduce confusion in wants and needs. But according to Camerer, Loewenstein and Prelec (2004) if people take a continuous study on how utilities function they will slowly bring the utilities together. Therefore consumers can be able to use the information to competently address the global financial crisis. iv. Neuroeconomics provides for an avenue where the use of earned money is more important than unearned money. This is because when money is earned the midbrain record more activity than when the money is not earned. This discovery in neuroeconomics can be used to explain why some people spend lavishly and others carefully. Also as a result of this discovery people will combine their efforts in earning money rather than concentrate on being given, as this is one of the many causes of Global Financial Crisis. Therefore this discovery would encourage people in the present world economy to engage more in earning money rather than being given, hence curbing the global financial crisis. The use of neuroeconomics to promote sales Yes I will use neuroeconomics to be able to promote the company sales. This is because of the following stated reasons. 1. Neuroeconomics collects more comprehensive data than survey, interviews, observations and company owned reports. This is because according to Camerer, Loewenstein and Prelec (2004) neuroeconomics use neuroscience, which is established by neuroscientists who asks the brain and not question any individual. It is possible therefore that analysis got from neuroscience will be more important to the business. This may include consumer welfare and even confidence that when correctly understood improves the respective performance of a firm. 2. Neuroeconomics produces great results that a firm may need to be able to identify appropriate customer needs and even plan for the future effectively. As stated by Camerer, Loewenstein and Prelec (2004) neuroeconomics research may be able to provide a link to the brain mechanisms with variables that fosters utilities, beliefs and planning ahead that can be linked with observable behaviour according to the choices. But according to Ariely, Loewenstein and Prelec (2003) elicited preference only vary substantially with descriptions and procedures. Therefore neuroeconomics might just provide to the firm how they can make a choice and scale their preferences well, which are very important in the development of a given particular firm. 3. Neuroeconomics could further be used to explain to firm choices which are considered and observed differently in theory. For example studies carried out by Ariely, Loewenstein and Prelec (2003), indicated that a part of the brain called the insular cortex is responsible to show all the kinds of behaviour that will be displayed by a gambler and his relation with his other people in the game. Therefore the idea that is concerned with making appropriate choices on how to make given sales can be listed and analyzed significantly an effectively using Neuroeconomics. 4. Neuroeconomics utilizes neuroscience which works effectively to ensure that a standard economic state is competently attained. For example according to Gardner and Lowinson (1991) when a drug addict consumes a dosage of cocaine he will develop a want for heroine which is a stronger and related substance to cocaine. If the brain can function appropriately it is intended brain to add value to human capital and attain optimization in labour markets discrimination. Therefore knowing neuron mechanisms can be able to tell the firm of the customers’ behaviour and how best human capital can be used to enhance sells and ability of the firm. Also when an individual’s mood changes dramatically they also change the way they purchase products. The information is very important as it will guide the firm owner effectively to make decisions on the proper ways to conduct the firm’s transactions. Conclusion Neuroeconomics is basic phenomena in economics that combines a number of neuroscience procedures to ensure that goals in economics are achieved competently. It is also intended to make processes in economics easier and more diverse to handle. It has come with ways that can now prove the effective utilization of the brain to carry out various activities in economics. There are four lobes that enhance the operation of the brain towards effective response and this includes the frontal, occipital, temporal and parietal, they each posses a distinct function. Neuroeconomics can further be used to increase sales in a firm by helping understanding customers’ behaviour in a more coherent way; it also assists making of choices easier and data collection from customers effective. Therefore the continuous studies made in neuroeconomics are effective in facilitating growth in economics. List of References Ariely, D., Loewenstein, G. and Prelec, D., 2003.Coherent arbitrariness: stable demand Curves without Stable Preferences, Quarterly Journal of Economics, 118, p. 73–106. Camerer, C. F., 2003.Behavioral Game Theory: Experiments on Strategic Interaction. Princeton University Press: Princeton. Camerer, C., Loewenstein, G. and Prelec, D., 2004. Neuroeconomics: How neuroscience can Inform economics [pdf]. Available at :< http: //www.hss.caltech.ed u/!camerer/neurojel22f in al0504.pdf.> [Accessed 2 May 2012] Gardner, E. L. and Lowinson, J., 1991.Marijuana’s interaction with brain reward systems: Update 1991. Pharmacology Biochemistry and Behavior, 40, p.571–580. Glimcher, P., 2002. Decisions, Uncertainty and the brain: The science of neuroeconomics.MIT Press: Cambridge. LeDoux, J. E., 1996.The emotional brain: The mysterious underpinnings of emotional Life. Simon & Schuster: New York. National Research Council, 1999.Pathological Gambling, National Academy Press,Washington, DC. Prelec, D. and Loewenstein, G., 1998.The Red and the Black: Mental Accounting of Savings and Debt, Marketing Science, 17,p. 4–28. Read More