Neuroeconomic Theory: Neuroeconomic Theory: Using Neuroscience to Using Neuroscience to

Understand the Bounds of Understand the Bounds of RationalityRationality

Workshop – Biology and Economics (June 2011)Workshop – Biology and Economics (June 2011)

Juan D. CarrilloJuan D. CarrilloUSC and CEPRUSC and CEPR

Theoretical REsearch in Neuroeconomic Decision-making

Neuroeconomic TheoryNeuroeconomic Theory

Use evidence from neuroscience, neurobiology and neuroeconomics to revisit economic theories of decision-making

Physiological constraints

Existence of multiple systems in

the brain

Neuroscience evidenceLimited interactions

Hierarchical structure

Conflicting objectives …

in flow of information

in processing capacity

in memory …

Neuroeconomic TheoryNeuroeconomic Theory

Revisit theories of decision-making

Model of bounded rationality

Behavioral anomaly (“output”)

Brain architecture (“input”)

no!

yes

Obtain “micro-

microfoundations”

Processes taken for granted (learning, information processing,

etc.)

Characteristics traditionally exogenous

(discounting, risk-aversion, etc.)

The brain is, so it should be modeled as,

a multi-system organization

Neuroeconomic TheoryNeuroeconomic Theory

Organizations (pre-theory of the firm): f(k,l)

Individual (pre-neuroeconomics): U(x,y)

Model 1 Model 1 (Brocas-Carrillo, AER 2008)

• Intertemporal choice: 2 dates of consumption / labor • Utility

),( and ),( 2211 ncnc

“Principal” Pcortical system

“Agent 2” A2

limbic system at date 2

where θt is valuation at date t known only by At

Intertemporal budget constraint:

At chooses his preferred pair … but P can restrain At ’s choices, and

we allow any rule / restriction

2121 )1()1( nrncrc

“Agent 1” A1

limbic system at date 1

111 )( ncu 222 )( ncu

])([])([ 222111 ncuncu

Model 1 Model 1 (Brocas-Carrillo, AER 2008)

Optimal consumption / labor rule (under asymmetric information):

• Consumption at t depends on labor at t current consumption tracks earned income

• Informational conflict endogenous emergence of time-preference rate

Positive ( (t+1) < (t) ) Decreasing impatience ( (t+1) / (t) > (t) / (t-1) )

Model 2 Model 2 (Brocas-Carrillo, AER 2008)

• “Incentive salience”- One system mediates motivation to seek pleasure (wanting)- A different system mediates the feeling of pleasure (liking)

Principal P

Agent A ncu )(

ncu )(

> 1: A is tempted to over-consume (biased motivation)• P does not integrate A’s “salience”• P can impose any choice but θ is known only by A

Model 2 Model 2 (Brocas-Carrillo, AER 2008)

Optimal consumption rule (under asymmetric information):

• P imposes only two constraints: consumption cap and budget balance

• A chooses:- If θ < θ* : unconstrained optimal pair given his bias- If θ > θ* : same pair as an agent with valuation θ*

Rationale for simple rule: “do what you want but don’t abuse” Stronger bias () tighter control ()

Model 3 Model 3 (Alonso-Brocas-Carrillo, mimeo 2011)

CEScentral executive

system

210 UUU

200

0000 )(

1),(

xxU

A0

(lifting)

Motor function0 “public

info.”

222

2222 )(

1),(

xxU

A2

(spelling)

211

1111 )(

1),(

xxU

A1

(rotation)

Cognitive functions 1 and 2

1 and 2 “private info.”

x0 x1 x2

kxxx 210

• CES allocates resources {x0, x1, x2} to A0, A1, A2

Optimal allocation to each system (under asymmetric information):

• P imposes a cap to Ai (weakly) decreasing in j

Each system has minimum guaranteed resources Better performance in easy tasks than in difficult tasks

• Task inertia: conditional on present needs, allocation of Ai is higher if past needs were high.

Model 3 Model 3 (Alonso-Brocas-Carrillo, mimeo 2011)

• The brain is a multi-system organization.

• It is time to open the black box of decision-making processes:- Neuroscience brings the knowledge- Microeconomics brings the tools

• Bounded rationality models based not on inspiration but on physiological constraints derive behaviors from brain limitations

ConclusionsConclusions