Neuroeconomics: Volume 20

Neuroeconomics is the study of how the brain makes economic decisions. By its nature neuroeconomics studies the mechanisms of decision-making, assumed to be computational, in order to better understand the strategies people use and the choices that people make. The focus of this book is how neuroeconomics connects to health economics in a way that improves our understanding of health care and treatment decisions. This is natural for several reasons. First, the brain and the body are intimately connected to each other and the health of one depends on the other. Second, the health system is inherently about decisions. Decisions to stay healthy, decisions to diagnose illness, decisions to treat, decisions to invest in new treatments, decisions to insure, and decisions to pay. Finally, these decisions can be difficult, as the media's consistent attention to this area attests. In light of this, for this volume we chose to include chapters that review basic research on emotion or social preference that have direct relevance to decisions in health economics. We have also included chapters that refer more specifically to some aspect of people's health care or treatment decisions. In the following we indicate the chapters within each topic area. Although many chapters could arguably fit in multiple categories, we have listed each chapter only once and without particular order.

Purpose – We summarize three previous neuroeconomic studies with two features that distinguish them from most others in experimental economics: (1) the use of physical pain to induce incentives and (2) acquisition of data on brain activation levels. By correlating behavior when payoffs are painful with brain activation, we are able to test for the neurobiological relevance of important phenomena previously observed in experimental studies that are at odds with classical economic theories of decision-making. These specific phenomena are (a) negative discounting of future payoffs; (b) nonlinear probability weighting; (c) the experience of regret and rejoice when making a decision under risk.

Methodology/approach – The expectation of pain is created through the use of mild electric shocks to the top of the foot. Pain confers disutility, so decisions are made in the domain of losses relative to the status quo. Simultaneous with these decisions, brain activation data is acquired through functional magnetic resonance imaging (fMRI).

Findings – We find evidence for negative time discounting of electric shocks. Participants who exhibited the most extreme forms of this discounting were distinguished by early and robust activation of a subset of the cortical pain matrix. We also find evidence for probability weighting in the domain of electric shocks, which is manifest at the neural level. We find evidence both behaviorally and neurally for regret and rejoice functions for painful outcomes.

Originality/value of chapter – Previous experimental economic studies in the domain of losses have typically used monetary rewards. Here, we report behavioral effects and neural correlates using pain.

Purpose – Initial explorations in the burgeoning field of neuroeconomics have highlighted evidence supporting a potential dissociation between a fast automatic system and a slow deliberative controlled system. Growing research in the role of emotion in decision-making has attempted to draw parallels to the automatic system. This chapter will discuss a theoretical framework for understanding the role of emotion in decision-making and evidence supporting the underlying neural substrates.

Design/Methodology/Approach – This chapter applies a conceptual framework to understanding the role of emotion in decision-making, and emphasizes a distinction between expected and immediate emotions. Expected emotions refer to anticipated emotional states associated with a given decision that are never actually experienced. Immediate emotions, however, are experienced at the time of decision, and either can occur in response to a particular decision or merely as a result of a transitory fluctuation. This chapter will review research from the neuroeconomics literature that supports a neural dissociation between these two classes of emotion and also discuss a few interpretive caveats.

Findings – Several lines of research including regret, uncertainty, social decision-making, and moral decision-making have yielded evidence consistent with our formulization – expected and immediate emotions may invoke dissociable neural systems.

Originality/value – This chapter provides a more specific conceptualization of the mediating role of emotions in the decision-making process, which has important implications for understanding the interacting neural systems underlying the interface between emotion and cognition – a topic of immediate value to anyone investigating topics within the context of social-cognitive-affective-neuroscience.

Purpose – This chapter focuses on individual differences in anxiety, by reviewing its neurobiology, cognitive effects, with an emphasis on decision-making, and recent developments in neuroeconomics.

Methodology – A review and discussion of anxiety and decision-making research.

Practical implications – This chapter argues that by making the step from emotional states to individual differences in emotion, neuroeconomics can extend its neurobiological roots and outreach its current clinical relevance.

Value of chapter – This chapter contributes to the literature on individual differences in emotion and their effects on decision-making, which is increasingly important in mainstream behavioral economics and neuroeconomics.

Purpose – The aim of the chapter is to show how two important facts of physicians’ behavior, (i) their tendency to “create” the demand for medical practices, and (ii) their delay and reluctance in using new treatments and therapies, can be explained with the lens of the neuroeconomics research on the neural and behavioral basis of regret.

Methodology – This chapter adopts a neuroeconomics perspective on decision-making, asking how the brain represents values and generates emotional states, which consequently influence choices. In the line of recent work on emotion-based decision-making, we expect to be able to characterize the brain areas underlying the studied processes and to specify the functional relationship between rational decision-making and the emotional influences that modulate these decisional processes.

Originality – Neurobiological approaches can contribute significantly to a better understanding of the cognitive and emotional underpinnings of medical decision-making, from how physicians might evaluate and anticipate the effect of alternative therapies, to how patients might anticipate future consequences of their health choice. This can explain some features of the doctor–patient relationship which are not consistent with simple maximization models.

Findings – Our findings suggest that physicians’ behavior can be often explained by regret avoidance. Likewise, they suggest that physicians play as actual agents when they make medical decisions that will affect the future well-being of their patients.

Research limitations – We limited our analysis to the potential role of anticipated regret; therefore, this chapter neglects many important factors of the health sector.

Purpose – Responding negatively to inequity is not a uniquely human trait. Some of our closest evolutionary ancestors respond negatively when treated less well than a conspecific. Comparative work between humans and other primates can help elucidate the evolutionary underpinnings of humans’ social preferences.

Methodology/approach – Results from studies of nonhuman primates, in particular chimpanzees and capuchin monkeys, are presented in comparison to human results that have been collected during economic game studies in humans, such as in the Ultimatum Game or Impunity Game.

Findings – Among nonhuman primates, a frequent behavioral reaction to inequity is to refuse to continue the interaction. While in some cases this response appears to be caused by the inequitable distribution, in others, it seems to be caused by another individual's inequitable behavior. While these reactions are similar to those of humans, this reaction does not appear to be a sense of fairness in the way that we think of it in humans. Neither nonhuman primate species alters their behavior when they are the benefited individual, and in an experimental situation, chimpanzees do not alter their behavior to obtain food for their partner as well as for themselves.

Originality/value of the chapter – Although there are differences between human and nonhuman primate responses, such studies allow us to better understand the evolution of our own responses to inequity. Given the strong behavioral reactions that even monkeys show to inequitable treatment, it is not surprising that humans are concerned with equity. Such comparisons increase understanding of issues such as healthcare disparities in humans.

Purpose – This chapter addresses the nature, formalization, and neural bases of (affective) social ties and discusses the relevance of ties for health economics. A social tie is defined as an affective weight attached by an individual to the well-being of another individual (‘utility interdependence’). Ties can be positive or negative, and symmetric or asymmetric between individuals. Characteristic of a social tie, as conceived of here, is that it develops over time under the influence of interaction, in contrast with a trait like altruism. Moreover, a tie is not related to strategic behavior such as reputation formation but seen as generated by affective responses.

Methodology/approach – A formalization is presented together with some supportive evidence from behavioral experiments. This is followed by a discussion of related psychological constructs and the presentation of suggestive existing neural findings. To help prepare the grounds for a model-based neural analysis some speculations on the neural networks involved are provided, together with suggestions for future research.

Findings – Social ties are not only found to be important from an economic viewpoint, it is also shown that they can be modeled and related to neural substrates.

Originality/value of the chapter – By providing an overview of the economic research on social ties and connecting it with the broader behavioral and neuroeconomics literature, the chapter may contribute to the development of a neuroeconomics of social ties.

Purpose – This chapter discusses the role of emotion expression in decision-making. To understand connections between emotion and decision it is helpful first to differentiate between emotion experience and emotion expression. Understanding how emotion expression influences decision-making is important as a practical matter. However, in contrast to emotion experience, economic research has paid little attention to the significance of emotion expression in decision-making.

Approach – I review recent studies on emotion expression, paying specific attention to possible connections between emotion expression, punishment, fair economic exchange, and well-being.

Practical implications – In contrast to emotions, which are typically difficult to control, I suggest that opportunities for emotion expression can feasibly be manipulated through appropriately designed policies. I further suggest that this approach may have the ability to positively affect well-being and economic outcomes.

Value of the chapter – The chapter provides new perspectives on how policy-makers can benefit by understanding the effect of emotion expression in decision-making. The chapter also suggests future research to improve our understanding of emotion expression.

Purpose – This experimental economics study using brain imaging techniques investigates the risk-ambiguity distinction in relation to the source preference hypothesis (Fox & Tversky, 1995) in which identically distributed risks arising from different sources of uncertainty may engender distinct preferences for the same decision maker, contrary to classical economic thinking. The use of brain imaging enables sharper testing of the implications of different models of decision-making including Chew and Sagi's (2008) axiomatization of source preference.

Methodology/approach – Using fMRI, brain activations were observed when subjects make 48 sequential binary choices among even-chance lotteries based on whether the trailing digits of a number of stock prices at market closing would be odd or even. Subsequently, subjects rate familiarity of the stock symbols.

Findings – When contrasting brain activation from more familiar sources with those from less familiar ones, regions appearing to be more active include the putamen, medial frontal cortex, and superior temporal gyrus. ROI analysis showed that the activation patterns in the familiar–unfamiliar and unfamiliar–familiar contrasts are similar to those in the risk–ambiguity and ambiguity–risk contrasts reported by Hsu et al. (2005). This supports the conjecture that the risk-ambiguity distinction can be subsumed by the source preference hypothesis.

Research limitations/implications – Our odd–even design has the advantage of inducing the same “unambiguous” probability of half for each subject in each binary comparison. Our finding supports the implications of the Chew–Sagi model and rejects models based on global probabilistic sophistication, including rank-dependent models derived from non-additive probabilities, e.g., Choquet expected utility and cumulative prospect theory, as well as those based on multiple priors, e.g., α-maxmin. The finding in Hsu et al. (2005) that orbitofrontal cortex lesion patients display neither ambiguity aversion nor risk aversion offers further support to the Chew–Sagi model. Our finding also supports the Levy et al. (2007) contention of a single valuation system encompassing risk and ambiguity aversion.

Originality/value of chapter – This is the first neuroimaging study of the source preference hypothesis using a design which can discriminate among decision models ranging from risk-based ones to those relying on multiple priors.

Purpose – Long-term care (LTC) services assist people with limitations in the ability to perform activities of daily living (ADLs) as a result of chronic illness or disabilities. We discuss possible behavioral explanations for the under-purchasing of LTC insurance, as well as the current state of knowledge on the neural mechanisms behind these behavioral factors.

Findings/approach – Ideas from behavioral economics are discussed, including risk-seeking over losses, ambiguity-preferring over losses, hyperbolic discounting, and the effect of the aging process on the underlying neural mechanisms supporting these decisions. We further emphasize the role of age, as aging is a highly heterogeneous process. It is associated with changes in both brain tissue as well as cognitive abilities, and both are characterized by large individual differences. Therefore, understanding the neural mechanisms is vital to understanding this heterogeneity and identifying possible methods of interventions.

Research implications – LTC financing and insurance is a looming issue in the next 10–20 years. It is important to understand the process by which people make decisions about LTC insurance, heterogeneity in decision processes across individuals, and how these decisions interact with changes in policy and private LTC insurance markets.

Originality/value of the chapter – By providing an overview of the current state of knowledge in behavioral economics of LTC insurance and the neuroscience of aging, this chapter provides some new directions in the emerging area of neuroeconomics of aging.

Purpose – This chapter offers an integrative review of psychological and neurobiological differences between younger and older adults that might impact economic behavior. Focusing on key health economic challenges facing the elderly, it offers perspectives on how these psychological and neurobiological factors may influence decision-making over the life course and considers future interdisciplinary research directions.

Methodology/approach – We review relevant literature from three domains that are essential for developing a comprehensive science of decision-making and economic behavior in aging (psychology, neuroscience, and economics), consider implications for prescription drug coverage and long-term care (LTC) insurance, and highlight future research directions.

Findings – Older adults face many complex economic decisions that directly affect their health and well-being, including LTC insurance, prescription drug plans, and end of life care. Economic research suggests that many older Americans are not making cost-effective and economically rational decisions. While economic models provide insight into some of the financial incentives associated with these decisions, they typically do not consider the roles of cognition and affect in decision-making. Research has established that older age is associated with predictable declines in many cognitive functions and evidence is accumulating that distinct social motives and affect-processing profiles emerge in older age. It is unknown how these age differences impact the economic behaviors of older people and implies opportunities for path-breaking interdisciplinary research.

Originality/value of the chapter – Our chapter looks to develop interdisciplinary research to better understand the causes and consequences of age-related changes in economic decision-making and guide interventions to improve public programs and overall social welfare.

Purpose – This chapter examines the role of child health for the intergenerational transmission of human capital.

Methodology/approach – The chapter uses unique administrative data from German elementary school entrance examinations. The chapter considers child health conditions such as obesity, low birth weight, ear problems, eye problems, behavioral problems, asthma, and allergies. We control for socio-economic and demographic characteristics of children and their parents as well as for institutional factors such as duration of pre-school attendance.

Findings – We find that health conditions are more common among children of less-educated parents. We also find that health conditions have a substantially negative impact on school readiness, and the negative impact is considerably stronger for children of less-educated parents. In total, 55% of the school readiness gap can be attributed to health factors. Specifically, 19% of the gap can be attributed to differences in the prevalence of health conditions, and 36% of the gap can be attributed to differences in the severity of the impact. Thus, policies aimed at reducing disparities in child achievement should also focus on improving the health of disadvantaged children.

Originality – First, our study quantifies the extent to which the school readiness gap between parental education groups can be attributed to child health. Second, our data are of extraordinary quality, since they consist of a full sample of all children in one city and since they are collected during detailed examinations that were administered by government pediatricians.

Conceptual paper purpose – The purpose of this chapter is to examine a new conceptual model of addiction and interpret the results from delay discounting studies in light of this new perspective.

Methodology/approach – To accomplish this we (1) introduce this new conceptual model, (2) briefly review executive function, including evidence for executive dysfunction among the addicted, (3) describe the unique relationship of temporal discounting to the new model and executive dysfunction, and (4) reinterpret the discounting literature in light of this new conceptual model.

Findings – Addicted individuals discount the future more than controls. This is consistent with greater relative activation of the impulsive system and decreased relative activation of the executive system. It also supports the new conceptual model of addiction.

Research implications – The new model provides a model for understanding the observations from the broader area of research in temporal discounting.

Originality/value of chapter – Given the view of executive function as important for the cross-temporal organization of behavior, we think that temporal discounting, the valuing of future commodities, qualifies this process to be included as an executive function.

Purpose – A placebo effect is a (positive) change in health outcomes that is due to a (positive) change in beliefs about the value of a treatment. Placebo effects might be “behavioral,” in the sense that revised beliefs lead to behavioral changes or new actions that in turn yield changes in health outcomes. Placebo effects might also include a “physiological” component, which refers broadly to non-behavioral, brain-modulated mechanisms by which new beliefs cause changes in health outcomes. Nearly all formal economic models of human behavior are consistent with behavioral placebo effects, but strongly inconsistent with their physiological counterparts. The reason is that the latter effects can imply that expectations enter, rather than multiply, state-contingent preferences. It is therefore unfortunate that little evidence exists on physiological placebo effects. We report data from novel clinical experiments with caffeine that seek to provide such evidence.

Methods – Subjects visit the clinic on multiple occasions. On each visit they ingest either a placebo or caffeine pill. Subjects only know the probability with which the pill includes caffeine. We obtain physiological measurements prior to ingestion and at 30, 60, and 90min after ingestion. Importantly, we constrain subjects to remain seated and read pre-selected magazines during the interval between treatment and outcome measurement.

Findings – Our design provides particularly clean inference because it (i) eliminates the possibility of behavioral confounds; (ii) provides for measurements at the individual level; (iii) manipulates beliefs without deception; and (iv) uses salient rewards. We find evidence for the existence of physiological placebo effects mediated by expectations.

Implications – Our results are consistent with the possibility that the prefrontal cortex provides external, top-down control that modulates physiological outcomes, and make a case for the importance of research geared toward developing appropriate and tractable frameworks that accommodate non-linear relationships between expectations and preferences.