Truck and Barter

Neuroeconomics

Tyler Cowen points to this survery of the current findings in neuroeconomics. Considering how new this field is and the probability that one of the early practitioners will get a Nobel, I'm a little surprised that more aren't chomping at the bit. I can't say that the area is a particular interest to me, but this line of inquiry that Tyler mentions is:

What I would want most: A testable neuroeconomic theory of why risk premia vary over time in securities markets. But that is very far away.

I think I'm reading Tyler's mind( or he mine) since this is almost the exact question I find interesting. Here in Claremont we have Paul Zak who does work in this field and since he's my current Macro prof, I get a lot info about his findings. He was talking about using brain scans to map people's utility curves and the problem of investment decisions popped into my head.

The scenario he tests is this: what game would a person play? In one, there are four outcomes, with two of them the person gets $10 for a total expectation for the game of $5. In the second, there are four outcomes, but in only one is there a payoff of $20 with expected value $5. He has them play the game as he scans their brains. Initially people choose the first, but the payoff in the second is changed until they choose it. With this information, he maps their curves.

My thoughts had to do with international investing and why risk-premiums are different across countries and time. Studies have been done to show that emerging markets offer higher returns, but as history of the late 90's shows, this can be a bumpy ride. So why did investors pump money into these places in the mid-nineties only to flee a few years later? Or, why exactly were Russian bonds near 5% in the last couple of years?

On a side note, like biotech investing mentioned below, neuroeconomics also has barriers to entry not easily overcome. The first one is the need for a mountain of additional knowledge needed to study in this area. The second is that this is an expensive field with high costs to perform experiments. The cost per brain scan is, I think, $200(it maybe more). Unless your individually wealthy or working with somebody who has current funding, it would seem difficult to conduct research in this field. I should mention a third problem, this stuff makes me queasy.

Posted at November 7, 2004 05:47 AM

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