Neuroeconomics: the Neuro-psychology of Economics

 

Introduction

 

At this time in our world history when wars, conflict and the inability to  collaborate still dominate the world news, a united global community seems as far away as ever. Unfortunately, given the accelerating rate of anthropogenic impacts,  we don’t have the luxury to remain apart. Collaboration is no longer an option, but is critical for the survival of our species. The question on everyone’s mind is “How do we achieve the required unity in this short period of a few years?” One clue is to look at the underlying psychology motivates all our behavior. The study of neuroscience and neuropyschology  has a very important role to play in unpacking the causes of behaviors that drive us away from collaboration.  Many argue that an economic system based upon self-interest play s a key role in the anthropogenic destruction of ecology and society.  Out of this apparent connection between neuroscience and economics, a new multidisciplinary field called  Neuroeconomics has emerged. Neuroeconomics combines neuroscience with economics to study  how the evolutionary design of brains give rise to economic systems. Perhaps the most important insight of neuroscience is that human beings are both individuals and social creatures. Our brains appear to be designed to work in social groups and this means it must have a dual set of structures (circuitry and hormones) that guides self-interest behavior to preserve ourselves on the one hand AND other-interest behavior to preserve others on the other hand. By studying this connection, the hope is that insights in neuroscience can shed light on destructive economic behavior with the aspiration of  modifying them towards evolving a more affective society.

The history of modern neuro-economics can be roughly divided into three stages:

  1. the pioneering work of Paul MacLean and Gerald Cory and their Dual Motive Theory and Conflict Systems Neurobehavioral (CNS) model
  2. neuroscience criticism of MacLean and Cory’s model
  3. later work that refines MacLean and Cory’s model and also explores other directions

 

 

The Emergence of Modern Neuroeconomics 

Dual Motive Theory

The history of modern neuro-economics can be traced back to the pioneering work of Paul MacLean, founder and longtime chief of the Laboratory of Brain Evolution and Behavior, National Institutes of Health and author of The Triune Brain in Evolution: Role in Paleocerebral Function. MacLean was not only a noted scientist, conceiving the term Limbic System, but was also as a humanist who was deeply interested in the origin of meaning of life. In particular, MacLean was puzzled over why in spite of the intelligence of humans, they still behaved irrationally ways which threatened their own individual as well as species survival. He felt that study of the brain was the key to answering this question. Among his pioneering achievements, in 1952 he popularized the research of Paul Broca’s limbic nodes which surrounded the brainstem of mammals, coining the word popular term limbic system in the process. Then in 1970, MacLean introduced the Triune Brain Theory, which claimed that the human brain was divided into three autonomous but related functional sections which evolved sequentially over time.

The Maclean-Cory Dual Motive Theory (DMT)

The MacLean-Cory view of neuroscience, also known as Dual Motive Theory (DMT) is an important new theory finding its’ way into economics, creating a new field of economics informed by neuroscience called neuroeconomics. This view contends that the way our holistic brain functions is as a continuous interaction between internal major neural structures. In particuliar, it is a constant interaction between the dual structures of the reptilian brain that is engaged in regulating the fundamental survival systems of the body and the paleomammalian brain (also called the Limbic system) which is responsible for caring for others.

This new view represents a serious challenge to mainstream economics(ME) and has begun to attract considerable interest. This is because, from the perspective of the DMT framework, the current ME model can be seen as pathological.

The Triune Brain

Before we understand DMT, we need to have a basic understanding of the Triune brain model created by evolutionary neuroscientist Paul MacLean, MacLean evolved the concept that the human brain is actually three interconnected brains in one,  a triune brain, which reflects to a considerable degree the evolutionary path from reptiles to early mammals to late mammals (MacLean 1990, pp. 8-9). These three brains are like biological computers operating somewhat independently but functioning with each other (Ploog 2003, p. 489). They are called:

  1. The Reptilian Complex – MacLean proposed that the reptilian complex was responsible for species typical instinctual behaviors involved in aggression, dominance, territoriality, and ritual displays.
  2. The Paleomammalian Complex – MacLean first introduced the popular term “limbic system” to refer to this set of interconnected brain structures (the septum, amygdala, hypothalamus, hippocampal complex, and cingulate cortex) in a paper in 1952. MacLean’s recognition of the limbic system as a major functional system in the brain is widely accepted among neuroscientists, and is generally regarded as his most important contribution to the field. MacLean maintained that the structures of the limbic system arose early in mammalian evolution (hence “paleomammalian”) and were responsible for the motivation and emotion involved in feeding, reproductive behavior, and parental behavior – in other words, empathatic behavior.
  3. The Neomammalian Complex –  consists of the cerebral neocortex, a structure found uniquely in mammals. MacLean regarded its addition as the most recent step in the evolution of the mammilian brain, conferring the ability for language, abstraction, planning, and perception.
The theory was greatly popularized by Carl Sagan in his book The Dragons of Eden (1977) and detailed in his major work The Triune Brain in Evolution: Role in Paleocerebral Functions in 1990. The Triune theory was considered one of the most influential discoveries in neuroscience science since World War II.  But this popularity was short lived. Only two years after the book’s release,  MacLeans theory was highly critiqued by neurobiologists,  first in Science (October 12,1990: 303-05) and later in American Scientist (September- October 1992: 497-98).. Studies based on paleontological data and comparative anatomical evidence refuted MacLean’s Triune brain model, which strongly suggested that the the major brain regions MacLean identifies did not develop separately from each other in the simple sequence which MacLean’s model asserts .

 

Figure 1: The Triune Brain Model (Source: John F Tomer )

In Cory’s DMT, the Neocortex is plays the executive role moderating interactions between the reptilian and paleomammalian brain complexes.

Conflict Systems Neurobehavioral (CSN) Model

Gerald Cory Jr, considered the father of DMT theory identifies the market as the expression of anorganic, homeostatically-regulated, algorithmic process of our social brain.  Dual Motive Theory (DMT) and Conflict Systems Neurobehavioral  model (CSN) are closely linked.

Figure 2: CSN Architecture (Source: Gerald Cory Jr.)

Dual motive implies a competition between the 2 archetypical neural circuits of Ego and Empathy. In CSN we find a social exchange brain architecture in which these two archetypes which we have inherited from our vertebrate, mammilian ancestors are driven by environmental tensions towards an optimal homeostatis of dynamic balance in social exchange activities.

An out-of-balance economic system, as found in the existing ME system translates into a pathological condition in the social brain. It results in overactivity in the ego neurocircuits and  underactivity in the affection, empathy neurocircuits.

 

 

The DMT, while generally seen as a more accurate description of reality has ventured out of its home area of brain physiology into concrete economic behavior while still in a nascent stage, leaving many academics feeling  the limitations of its explanatory powers. This is where a revised model of DMT offers better explanations in the field of economics. The idea of brain plasticity offers a possibility of growth in people’s soft brain mental capacities

 

A major step in moving brain theory into economics is Gerald Cory’s Conflict Systems Neurobehavioral (CSN) model. Cory is, in fact, considered the father of DMT. Cory based CSN solidly upon MacLean’s  Triune conception of brain physiology. It elucidates the dynamic balancing behavior of the neomammalian complex. According to Cory, the two core motivations are:

  1. ego or self-interest deriving from the reptilian brain
  2. empathy or other-interest deriving from the paleomammalian brain

and they may at times be out of balance. Due to this, it is up to the executive programming provided by the neocortex or neomammalian brain to attempt to bring about a balance between the two motivations (Cory 2006, pp. 26-27). The sequence is illustrated below:

  1. Unresolved conflict between self-interest (reptilian brain) and empathy (limbic system)
  2. Behavioral tension and stress are produced within the individual
  3. The executive program in the neocortex responds to deal with the difficulty
  4. The person is able to make a moral and rational choice
  5. A sense of balance is restored and tension is reduced or eliminated

Out of Balance Behavior

  • Highly egoistic behavior involves neglected empathy and may be experienced as a sense of obligation to others. Whereas others to whom the egoistic behavior is directed may experience a sense of imposition, hurt, and desire to ‘even the score’.
  • Highly empathetic behavior is just as out-of-balance and may be experienced as neglected self-interest, a need to ‘collect our due’, resentment, and victimization.

Dynamic Balanced Behavior

  • creates feelings of mutuality, shared respect, and a relative absence of tension

This dynamic balance is the central tendency and is associated with reciprocity, a universal norm of behavior. The CSN model tends to produce this balance, and thus cooperation, fairness, and morality, all outcomes facilitating desirable market and other economic behavior. As we learn, we become more competent to handle life situations and this results in rewiring of our brain’s neural pathways.  People develop emotional intelligence involving a variety of emotional competences. People’s efforts in this regard can be interpreted as an investment in personal or human capital. When we can manage our emotions better, we can raise our empathy levels, and attain a more balanced lifestyle.

The outcomes of Out-of-balance and Dynamic Balance behavior are summarized below:

Outcome of successful balancing:

  • compromise
  • fairness
  • justice
  • respect for self and others
  • a relative equality of ego and empathy

Outcome of unsuccessful balancing in egoistic range – self over others of:

  • power seeking
  • domination
  • assertiveness
  • competitiveness

Outcome of unsuccessful balancing in  empathetic range – others over self of:

  • self-sacrifice
  • submission
  • responsiveness
  • supportiveness

The Traditional Mainstream Economics (ME) model vs the new Dual Motive Theory (DMT)

Now we can explore how tranditional mainstream economics compares with Dual Motive Theory based upon a the MacLean-Cory DMT and CSN theory. What is immediately obvious is that the fundamental structure of the current mainstream economic system is highly distorted from the DMT/CSN perspective.

Mainstream Economics Model (ME) Assumptions

1. People’s dominant, sole motivation is self-interest

  • All other emotions or considerations are subordinate to self-interest
  • People may seem to act in the interests of others but only if it is in their self-interest to so so

2. People have infinite (or very high) cognitive capacity.

3. People have zero capacity for pure empathetic motivation.

4. Rationality involves applying logic or reason to choose or obtain the best possible outcome(s) (generally satisfaction of wants) for oneself regardless of the nature of the wants.

5. In the pure version of the ME model, no human capacity differences exist. Everyone has an infinite cognitive capacity and zero empathetic capacity. In revised, not so pure, versions of ME, people’s investment in various types of human capital, especially standard human capital, may change some of their human capacities.

Dual Motive Theory (DMT) Model Assumptions

1. People have two dominant motivations:

  • Ego or self-interest
  • Empathy or other-interest

2. People have limited, but adequate, cognitive capacity for most purposes (similar to but not the same as bounded rationality).

3. People have a strong capacity to achieve a balance between the two dominant motivations:

  • Imbalances tend to be corrected with the rise of tension or stress which directs people’s attention to the imbalance
  • Some imbalances are persisting and not easily corrected (they involve pathologies, either individual or societal)

4. Rationality has a different meaning than it does in the ME model. Rationality in the DMT model involves:

  • striving for a balance between self- and other- interest as well as
  • application of logic and reason to attain the person’s goals or desires

Rationality is not a matter of simply maximizing the self’s utility or satisfaction. It involves doing well for self and doing well by others, ie. living a successful well-balanced life. This rationality is necessarily a matter of both ends and means. Behavior is not rational unless the person is attempting to help others (ends) as well as making choices (means) conducive to one’s own satisfaction.

5. Strictly speaking, the DMT model is silent on human mental capacities. The model, however, does imply that people have mental capacities such as the following:

  • Empathetic capacity
  • Cognitive capacity
  • Integrative capacity, capacity for achieving a desirable balance between ego and empathy
  • Achievement capacity, capacity for pursuing and attaining goals

6. The DMT model emphasizes the particular human capacities that arise from the structure of the brain or brain physiology. The essentials of brain physiology are the same for all humans, ie. they are determined by human genetic makeup. In this model, differences among individuals in brain capacity would be due to individual genetic differences and differences in how these capacities change over different life stages (also determined genetically). The DMT model is silent on difference in capacity among individuals on account of differences in investment in human capital. This aspect, however, could beadded to the model.

Revised Dual Model Theory (Revised DMT) Model Assumptions

1. People have two dominant motivations (ego and empathy)

2. People have limited cognitive capacity

3. People have a strong capacity to achieve a balance between the two dominant motivations

4. People tend to be rational in two senses:

  • applying reason to attain goals
  • striking a balance between self- and other-interest

5. People have many different soft brain mental capacities, and people are often highly motivated to raise some of these capacities (especially empathetic capacity) as part of their human development efforts

6. People and societies differ in their mental capacities based on the soft brain (or intangible capital) investments that they have made. Their mental capacities are typically below theirpotential level

A Paradigm Shift to an Economy based on Neuroeconomy

Traditional Mainstream Economic Paradigm

  • Anglo-American view of Economy and Enterprise
  • Based on sole self-interest view
  • Maslow’s pyramid of needs
  • Supply & Demand only based upon self-interest: buy low, sell high
  • No equation linking economics with human nature
  • Scientifically inaccurate theory
  • Sole self-interest breeds and justifies greed & inequality
  • Global trade seen as evil
  • Creates behavioral tension
  • Promotes national interest
  • Domination in trade

DMT Paradigm

  • Global view of Economy and Enterprise
  • Based on balance of ego (self-interest) and empathy (other-interest)
  • CSN model
  • Supply & Demand based on dual of self and other interest
  • Equation linking economics with human nature
  • Scientifically accurate theory
  • Dual motivation breeds justice, fairness & equality
  • Global trade seen as empowering
  • Relieves behavioral tension
  • Promotes global interest
  • Bilateralness in trade

Applying DMT and CSN

One country that is trying to apply Dual Motive Theory is Bhutan, a small Buddhist country bordering China and Indial. On April 2, 2012, the prime minister of Bhutan convened a UN meeting in which 600 delegates attended to begin work on the world’s first social index not based on the GDP, but on happiness.

Read more here…

 Criticism of MacLean and Cory’s DMT and CSN

William Hodos  argued in his book Comparative Vertebrate Neuroanatomy (Hodos, 1996) that an extensive body of work in comparative neurobiology over the past three decades unequivocally contradicts this theory. Paul Patton argued in a Scientific America article (Patton, 2008)  that it is now apparent from studies on vertebrate evolutionary history that a simple linear hierarchy cannot adequately account for the evolution of brains or of intelligence.  Or, as David puts it, Triune Brain Theory is just “completely wrong.”
While there is only general scientific consensus on the applicability of MacLean’s Triune model, some people find it to be a helpful model because of its broad explanatory value.
In summary, today, the Triune brain concept is seen as a highly simplified but powerful organizing theme.

The abstract from John F Tomer’s paper, Brain Physiology, Egoistic and Empathetic Motivation, and Brain Plasticity: Toward a More Human Economics reveals the impact that recent discoveries in neuroscience can have on economics:

Abstract

The brain physiology research of leading evolutionary neuroscientist, Paul MacLean, has important implications for human economic motivation. Gerald Cory in his research has admirably utilized MacLean’s findings and has persuasively explained that humans have two dominant motivations: 1) ego or self-interest and 2) empathy or other-interest, which our brains attempt to balance.

This view is clearly important and at odds with mainstream economics in which self-interest is the dominant motivation. The MacLean-Cory view, also known as Dual Motive Theory (DMT), represents a serious challenge to mainstream economics. However, the DMT leaves something to be desired. While understanding the promise of the perspective deriving from brain physiology, some scholars have expressed dissatisfaction with it. Accordingly, the purpose of this paper is to revise DMT utilizing the concept of brain plasticity and argue that the mainstream economic image of the brain is not supported by current knowledge of brain science.

Brain plasticity refers to the ability of the brain to change structurally and functionally as a result of input from the environment. Some of this plasticity is no doubt genetically determined but some brain change is a product of individual effort and represents the individual’s investment in intangible capital (standard human capital, social capital, personal capital, and so on). In this revised view, the balance that individuals, groups, and societies strike between ego and empathy orientation is to a great extent determined by these intangible investments, not simply by brain physiology.

(Source: Brain Physiology, Egoistic and Empathetic Motivation, and Brain Plasticity: Toward a More Human Economics )

Emergence of New Theories

Paul Zak, Oxytocin and the Neurobiological Basis for Markets

  

Paul J. Zak is the founding Director of the Center for Neuroeconomics Studies and Professor of Economics, Psychology and Management at Claremont Graduate University and serves as Professor of Neurology at Loma Linda University Medical Center. He has degrees in mathematics and economics from San Diego State University, Ph.D. in economics from University of Pennsylvania and post-doctoral training in neuroimaging from Harvard. Paul is credited with the first published use of the term “neuroeconomics” and has been a pioneer in this new discipline. His lab discovered in 2004 that an ancient chemical in our brains, oxytocin, allows us to determine whom to trust. Oxytocin is correlated with compassion, empathy and caring. This knowledge is being used to understand the basis for modern civilizations and modern economies, improve negotiations, and treat patients with neurological and psychiatric disorders.

Paul Zak sometimes demonstrates his work by getting his audience members to do a  simple neurological experiment:

  1. sit down and rotate one of your legs in a clockwise direction
  2. then stretch out one of your arms straight and trace out a large imaginary number 6 in the air

The result is that leg will often automatically change from clockwise to a counterclockwise direction to follow your arms motion instead. This experiment causes us to ask the question “Who is in charge?” Although we feel we are conscious, volitional beings, we can see for ourselves that we are also driven by unconscious, underlying processes.

Zak was interested in studying trustworthiness. He realized that in countries that had a high degree of trusthworthiness, there were more economic interactions and therefore, more wealth generated. In countries where there were lower levels of trustworthiness, there as less trade and less wealth. What Zak was after was a physical indication of trusthworthiness.

In a pioneering experiment, Zak performed an economic experiment using computers and measured study participants blood afterwards. He discovered  that a hormone oxytocin was released whenever there was a trusting transaction. At that time, oxytocin was thought to be a reproductive hormone that was released during  childbirth, sex and during a mother’s period of milk lactation. To his surprise, Zak discovered that oxytocin was released during positive social interactions. During a successful economic transaction, both male and female humans released oxytocin.  It appeared as if oxytocin was positively correlated with positive, reciprocating social interactions. What if a social interaction didn’t go well? Was there another hormone released? Zak indeed discovered that an unsuccessful economic transaction lead to a measurable and correlated release of testosterone.

Now we can explain the hormones of economic transactions. From Zak’s perspective, humans are, by design hyper-social creatures andwe are equipped with hormones that reinforce positive interactions and deal with negative ones. Markets themselves are seen as natural and predictable social expressions of our desire to reciprocate with each other.

Zak discovered that on average, there is about 5% of the population who never release oxytocin during these experiments. These people had the profile of psychopaths. In further experiments in the field it has been revealed that significant childhood abuse and neglect as well as high levels of stress can disrupt the release of oxytocin.

   

Why do human beings engage in courageous acts of compassion but also perpetrate violence?

Could the apparent flip-flopping morality of our species have a hidden explanation?

The Moral Molecule is a first-hand account of the discovery of a molecule that makes us moral. It reveals that compassion is part of our human nature, why loneliness can kill you, and why your neighbor may be a psychopath.    From the laboratory to the jungles of Papua New Guinea, Paul Zak takes you on an amazing journey that reveals what it means to be human.

–  from the Moral Molecule website

 Conclusion

The application of neuroscience to economics is long overdue. As far as economics is a system behavior arising from the social dynamics of a large group of people, neuroscience that reveals fundamental behavior of individual brains is relevant. Within the new neurally-inspired framework of Dual Motive Theory (DMT) and the constructed Conflict System Neurobehavioral (CSN) model, the failure of mainstream economics (ME) can be seen to arise from two fundamental errors:

  1. Not recognizing the fundamental importance of empathy
  2. Overemphasizing ego – self-interest motivation unbalanced by concern for others (ie. Greed)

The market encodes the social brains ego and empathy archetypical neural circuits as demand and supply. The individual consequences arising from these social system level behaviors is profound because they result in stress on individual social brains. In fact, the market itself is the institutionalized product of the ego/empathy dynamic of our evolved neural architecture (Cory)

The pathologies of the current ME are far from benign and are not just academic or theoretical problems; they have serious consequences on affected members of societies. A pathological mainstream economic affects the individual members of society because they serve as the foundation for:

  • the design of institutions
  • the expression of values
  • the development of norms and policies

When these are unbalanced, they lead to excessive tensions and stress in the socio-economic system with corresponding effects on individual brains.

Recommendations

Mainstream economics is failing its citizens spectacularly due to its ignorance of fundamental brain science. In particuliar, with most if not all policies based upon polarized self-interest (greed), it has failed to incorporate empathy as a core human motivation. The result, from the perspective of neuroeconomics is harmful stress pervasive throughout modern society. The key to re-establishing a healthy society is to change policies to achieve a balance of self AND other policies. To remove these existing stresses requires replacing many of the current one-sided policies with new ones which incorporate elements of empathy as a fundamental motivation. The result will be a more humane and less stressed society.

Because neuroscience knowledge can have important consequences in economics, economists have a responsibility to broaden their knowledge by incorporating the latest research of neuroscience into their field. In particuliar,  they must realize that there is strong motivation to invest in intangible capital because it can raise empathetic capacity and the capacity for achieving ego/empathy balance.

(Source: John F Tomer,  Brain Physiology, Egoistic and Empathetic Motivation, and Brain Plasticity: Toward a More Human Economics )