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Neuroeconomics of Games and Decisions* Colin Camerer, Caltech  

Neuroeconomics of Games and Decisions* Colin Camerer, Caltech   . Neuroeconomics: Grounding micro-economics in details of neural activity Part of behavioral economics (using psychology to inform theories of rationality limits) Part of experimental economics (new techniques)

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Neuroeconomics of Games and Decisions* Colin Camerer, Caltech  

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  1. Neuroeconomics of Games and Decisions*Colin Camerer, Caltech   • Neuroeconomics: • Grounding micro-economics in details of neural activity • Part of behavioral economics (using psychology to inform theories of rationality limits) • Part of experimental economics (new techniques) • Part of neuroscience (higher order cognition) *”Neuroeconomics” Camerer, Loewenstein, Prelec J EconLit (85 pp), Scan J Econ (25 pp), “Why economics needs brains” Nemmers Prize talk May 7, 2005

  2. Collaborators • Caltech: Meghana Bhatt, Ming Hsu, Ralph Adolphs, Cedric Anen, Steve Quartz • Iowa: Dan Tranel • Baylor: Brooks King-Casas, Damon Tomlin, Read Montague Nemmers Prize talk May 7, 2005

  3. Three directions in neuroeconomics • I. Support for rational-choice models • “Belief” neurons • Expected-value neurons • “Monkey shopping” satisfies GARP • II: Support for behavioral alternatives • Loss-aversion in monkey shopping • Learning in trust games • Ambiguity vs. risk (Knight, Ellsberg) • III: New concepts • Equilibrium as a “state of mind” • Neural correlates of “strategic IQ” • Biological basis of demand Nemmers Prize talk May 7, 2005

  4. Economically-important regions of the human brain Nemmers Prize talk May 7, 2005

  5. Cingulate (yellow), orbitofrontal (pink), amygdala (orange), somatosensory (green), insula (purple) Nemmers Prize talk May 7, 2005

  6. Important facts about the brain • Functional “modularity”… • …but “plastic” esp. in childhood • Behavior depends on circuits • Human brain is primate brain + neocortex • Language, social organization (institutions) • Infants, fraternity parties show similarity • Many biological functions are automated; conscious attention is scarce (flicker paradigm) Nemmers Prize talk May 7, 2005

  7. I: Rational choice in the brainMidbrain neurons anticipate reward (L), encode value function V(.) learning (R) (Schultz, Dayan, Montague Sci 97) Nemmers Prize talk May 7, 2005

  8. Neuron firing rates (y axis) encode expected value (x-axis) (Glimcher) Nemmers Prize talk May 7, 2005

  9. Monkeys play mixed equilibrium as humans do (Dorris-Glimcher Neuron 04) Nemmers Prize talk May 7, 2005

  10. Capuchin monkeys respond to prices (Keith Chen et al 05) Nemmers Prize talk May 7, 2005

  11. II: Behavioral economics in the brain • Monkey choices are sensitive to reference points • Reference point (initial food reward endowment) • 1 21 2 Outcome 1 1 (1,2) (1,2) Choice % 79% 21% 71% 29% Nemmers Prize talk May 7, 2005

  12. Design goal: Link stimuli with unobserved parametric processes/variables with circuitry 0-step thinking 1-step thinking Equilibrium C=br(B) w(red)-P(red) Nemmers Prize talk May 7, 2005

  13. Overview of fMRI Nemmers Prize talk May 7, 2005

  14. Data transformations Statistical parametric map (SPM) Design matrix Image time-series Kernel General linear model Realignment Smoothing Statistical inference Normalisation p <0.05 Template Parameter estimates Nemmers Prize talk May 7, 2005

  15. Ambiguity Aversion (with Ming Hsu et al) • This material is in review and cannot be publicly circulated at this time. Nemmers Prize talk May 7, 2005

  16. III: New ideas • Limited planning in bargaining limited steps of thinking • Equilibrium as a “state of mind” • Biological bases of demand Nemmers Prize talk May 7, 2005

  17. Rubinstein-Stahl alternating offershrinking-pie bargaining • 1 offers division of $5 ------------ accept ↓ 2 offers division of 2.50 ----------- accept ↓ 1 offers division of 1.25 ------------ accept ↓ (0,0) Nemmers Prize talk May 7, 2005

  18. Limited planning in bargaining (Science, 03) Nemmers Prize talk May 7, 2005

  19. Cognitive hierarchy thinking in games (Camerer, Ho, Chong, QJE 04) • Step 0 players choose randomly • Step k players have beliefs gk(h) • Step k players choose s*i(k)= argmax s Σh gk(h)πi(s,s*(h)) • One-step-below gk(k-1)=1 • Nagel (1995), Stahl-Wilson (1995), Costa-gomes-Crawford-Broseta (2001) • Nornalized overconfidence gk(h)= gk(h)/Σhk-1gk(h) • gk(h)= 0 for h>k • Link to hierarchical QRE (Palfrey-Rogers-Camerer, on this computer) Nemmers Prize talk May 7, 2005

  20. Limited equilibrationBeauty contest game • N players choose numbers xi in [0,100] • Compute target (2/3)*( xi /N) • Closest to target wins $20 Nemmers Prize talk May 7, 2005

  21. Nemmers Prize talk May 7, 2005

  22. Neural correlates of iterated belief (Bhatt-Camerer GEB in press) • 8 dominance-solvable games. • C, B, 2B in random order for each game • Paid for choice (x$.30) or accuracy B, 2B ($15) against live opponent outside the scanner. (Enables measure of scanner on behavior.) • N=16 Caltech community students Nemmers Prize talk May 7, 2005

  23. Example: 1-step (easy) game; B dominates A. L-R payoff separation allows “eye tracking” Nemmers Prize talk May 7, 2005

  24. Conformity to equilibrium: There are many nonequilibrium trialsNote: C matches 2B more often than B matches 2B Nemmers Prize talk May 7, 2005

  25. Equilibrium is a state of mind:Expected reward theory of mind + (in equilibrium ↓) (↓ out-of-equilibrium) Nemmers Prize talk May 7, 2005

  26. Subject complaining after an experiment (Zamir, 2000) Nemmers Prize talk May 7, 2005

  27. Ultimatum games: This is your brain on unfairness(Sanfey, Rilling et al, Sci 13 March ’03) Nemmers Prize talk May 7, 2005

  28. 2nd-order belief consistency differential activates dorsolateral prefrontal cortex (DLPFC) DLPFC also seen in ultimatum games after low offers (“intentions matter”) DLPFC is part of 2nd-order belief circuitry? Consistent 2nd-order beliefs (c=2b) vs inconsistent (“false”) (c≠2b) Nemmers Prize talk May 7, 2005

  29. Strategic IQ (x-axis): How much you earn from choices & beliefs Correlated (-) with activity in L insula in choice task  Are overly self-focussed people poor strategic thinkers? Deactivation in insula and high strategic IQ Nemmers Prize talk May 7, 2005

  30. Strategic IQ (x-axis): How much you earn from choices & beliefs Correlated (-) with activity in L insula in choice task  Are overly self-focussed people poor strategic thinkers? Insula and low strategic IQ Nemmers Prize talk May 7, 2005

  31. Correlates of higher strategic IQ Nemmers Prize talk May 7, 2005

  32. New ideas: Biological basis for demand • Economics takes demand as given. But… • Influence of advertising • Familiarity and habit formation (“tight playlist” radio stations) • Imitation of movie stars/TV shows • “LA Law” boom in law school applications • Sense-making drive demand for “closure”  lawsuits • Media: “If it bleeds, it leads”, NASCAR races • Does the amygdala control the TV remote? • Addiction: Is golf or shoe-shopping like heroin? • Labor market discrimination (Phelps et al)? • Unfamiliar black faces activate white student amygdalae Nemmers Prize talk May 7, 2005

  33. Conclusions • I: Rational choice processes in the brain • Monkey belief neurons, games, shopping • II: Behavioral economics in the brain • Monkey loss-aversion • Ambiguity activates amygdala-OFC, risk striatum • Lesion patients with OFC are “rational”…for the wrong reason? • III: New ideas from neureconomics • Limited strategic thinking equilibrium as a “state of mind” • Skill (strategic IQ) correlated + with precuneus, caudate, correlated - with insula • Biological basis of demand Nemmers Prize talk May 7, 2005

  34. Activation in cingulate cortex & spindle cell density Nemmers Prize talk May 7, 2005

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