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Neuroeconomics, an off-shoot of behavioural economics, emerged as a new field of study in the early 2000s' when economists, neuroscientists and psychologists began collaborating to better understand how people make financial decisions. Their aim was to fill in some of the gaps in economic theory.
A shortcoming of classical economic models is they're based on the notion that market participants make perfectly rational decisions, explains Camelia Kuhnen, president of the research group Society for Neuroeconomics. They fail to account for emotions, preferences and other human factors.
By using modern imaging technology to examine what happens inside the brain, neuroeconomists hope to gain insight about these influences.
Neuroeconomists are making strides in identifying the roles of various parts of the brain. Studies, for instance, show the nucleus accumbens, an area of the brain associated with pleasure, is activated when people are about to make risky decisions, says Lisa Kramer, an associate professor of finance at the University of Toronto, who has an interest in neuroeconomics. The anterior insula, a region associated with pain and fear, has been found become activate when people are about to make safe decisions.
This latter finding may suggest people make decisions, such as buying safe-haven bonds over stocks, out of fear.
But the economic applications for these findings are still largely elusive. It is not yet possible to make predictions on market behaviour, based on neuroscience, Dr. Kramer says, adding, "It would be dangerous if somebody told you that they could."
Dr. Kramer further cautions that "neuromarketing" companies that claim to predict consumers' choices based on brain activity measured by electroencephalogram may be overselling the technology's capabilities. "Spikes in those readings don't tell you anything about likes or dislikes or emotions. All they're telling you is brain activation," she says.
The limits of neuroeconomics have some skeptics wondering whether there's anything economists can learn at all from studying the brain.
"That's a bit grouchy," Dr. Kramer says. Unless researchers look, she says, they'll never know what they may find. "Let's see where it goes. Maybe we don't see any great applications yet, but we might eventually learn something."
In the meantime, there's growing demand among business schools for researchers who have some understanding of neuroscience, says Kuhnen, an associate professor of finance at the University of North Carolina at Chapel Hill.