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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
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

collaborators
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

three directions in neuroeconomics
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

cingulate yellow orbitofrontal pink amygdala orange somatosensory green insula purple
Cingulate (yellow), orbitofrontal (pink), amygdala (orange), somatosensory (green), insula (purple)

Nemmers Prize talk May 7, 2005

important facts about the brain
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

slide7

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

neuron firing rates y axis encode expected value x axis glimcher
Neuron firing rates (y axis) encode expected value (x-axis) (Glimcher)

Nemmers Prize talk May 7, 2005

monkeys play mixed equilibrium as humans do dorris glimcher neuron 04
Monkeys play mixed equilibrium as humans do (Dorris-Glimcher Neuron 04)

Nemmers Prize talk May 7, 2005

ii behavioral economics in the brain
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

design goal link stimuli with unobserved parametric processes variables with circuitry
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

overview of fmri
Overview of fMRI

Nemmers Prize talk May 7, 2005

slide14

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

ambiguity aversion with ming hsu et al
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

iii new ideas
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

rubinstein stahl alternating offer shrinking pie bargaining
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

limited planning in bargaining science 03
Limited planning in bargaining (Science, 03)

Nemmers Prize talk May 7, 2005

cognitive hierarchy thinking in games camerer ho chong qje 04
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

limited equilibration beauty contest game
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

neural correlates of iterated belief bhatt camerer geb in press
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

example 1 step easy game b dominates a l r payoff separation allows eye tracking
Example: 1-step (easy) game; B dominates A. L-R payoff separation allows “eye tracking”

Nemmers Prize talk May 7, 2005

slide24
Conformity to equilibrium: There are many nonequilibrium trialsNote: C matches 2B more often than B matches 2B

Nemmers Prize talk May 7, 2005

slide25

Equilibrium is a state of mind:Expected reward theory of mind + (in equilibrium ↓) (↓ out-of-equilibrium)

Nemmers Prize talk May 7, 2005

ultimatum games this is your brain on unfairness sanfey rilling et al sci 13 march 03
Ultimatum games: This is your brain on unfairness(Sanfey, Rilling et al, Sci 13 March ’03)

Nemmers Prize talk May 7, 2005

consistent 2 nd order beliefs c 2b vs inconsistent false c 2b
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

deactivation in insula and high strategic iq
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

insula and low strategic iq
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

correlates of higher strategic iq
Correlates of higher strategic IQ

Nemmers Prize talk May 7, 2005

new ideas biological basis for demand
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

conclusions
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

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