Economics is at the start of a revolution that is traceable to an unexpected source: medical schools and their research facilities. Neuroscience – the science of how the brain, that physical organ inside one’s head, really works – is beginning to change the way we think about how people make decisions.
Economics has always fallen back on the model of the 'rational human' when creating models, the idea being that humans in any given system fundamentally desire an increase in happiness (economists call this 'utility') and that the models will subsequently reveal objectives and methods for achieving utility.
This assumption that all humans behave rationally and make decisions that further their own happiness leaves economic models flawed, often disastrously. More often than not, humans are irrational and poor decision makers, with little foresight, they make sacrifices and sometimes even behave altruistically.
John Maynard Keynes thought that most economic decision-making occurs in ambiguous situations in which probabilities are not known. He concluded that much of our business cycle is driven by fluctuations in “animal spirits,” something in the mind – and not understood by economists.
It's not only humanity that economics underestimates, but often the very nature of the universe. Nassim Nicholas Taleb will wax lyrical about the Black Swans that plague predictive and reflective models of economics - dismissed outliers, unpredictable events, failures in the inherent nature of the model's range - but neuroeconomics seeks to build on the ironically un-fleshy and perhaps most important part of the models - the humans.
Neuroeconomics, as a way of informing economic theory through neuroscience also brings closer together the great human/computer analogy. Modern neuroscience, still very much in its infancy, springboards off the idea that the mind can be modelled on a computer and through this reflection behaves like a computer often in the biases of the science and the perceptions of the layman. Economic theory however has used these suppositions since almost the advent of the computer, if not before and so is thoroughly cemented in the 'platonic model' fallacy/philosophy.
The MONIAC water computer, developed in 1949, demonstrated and modelled economic systems with several variables using water. The idea that economies functioned systematically and predictably predated the widespread use of the computer.
Our idea of economies and humans as computers has failed uncountable times (Taleb again will tell you to examine the farcical error rate of financial forecasting) and yet we still begin our sciences with the assumption that nature can be reflected in the computer. Whether neuroeconomic findings will draw economics more into the irrational, unpredictable and the human or draw neuroscience into the flawed models of economics remains to be seen as will whether the merging of the fields will lead to a new way of approaching ourselves as humans and thus how it might shape history.
The brain, the computer, and the economy: all three are devices whose purpose is to solve fundamental information problems in coordinating the activities of individual units – the neurons, the transistors, or individual people. As we improve our understanding of the problems that any one of these devices solves – and how it overcomes obstacles in doing so – we learn something valuable about all three.
(quotes via)