Economics and Rational Decisions

It turns out that emotion really is a key factor, equal to or sometimes greater than reason.
This is a very interesting article in which a team did brain scans of people making economic decisions to see how their minds work.

Cohen and several colleagues organized a series of ultimatum games in which half the players—the respondents—were put in MRI machines. At the beginning of a round, each respondent was shown a photograph of another player, who would make the respondent an offer. The offer then appeared on a screen inside the MRI machine, and the respondent had twelve seconds in which to accept or reject it. The results were the same as in other, similar experiments—low offers were usually vetoed—but the respondents’ brain scans were revealing.

When respondents received stingy offers—two dollars for them, say, and eight dollars for the other player—they exhibited substantially more activity in the dorsolateral prefrontal cortex, an area associated with reasoning, and in the bilateral anterior insula, part of the limbic region that is active when people are angry or in distress. The more activity there was in the limbic structure, the more likely the person was to reject the offer. To the researchers, it looked as though the two regions of the brain might be competing to decide what to do, with the prefrontal cortex wanting to accept the offer and the insula wanting to reject it. “These findings suggest that when participants reject an unfair offer, it is not the result of a deliberative thought process,” Cohen wrote in a recent article. “Rather, it appears to be the product of a strong (seemingly negative) emotional response.”

This doesn't bode well for the communist/libertarian utopias that are sure to come this century. If people don't make rational decisions, it implies that markets are not all that rational either (housing bubble anyone?) and may not always produce the best result.

Unfortunately, while interesting, the results point more toward what *doesn't* work than to what will.