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Neuro-economics and Neuro-accounting. Sudipta Basu, John Dickhaut, Kevin McCabe and Greg Waymire. Neurons and Neuroeconomics. Problems, Humility and Promise. What are the issues?. What is the goal of Neuroeconomics? (Controversial) What is the fundamental building block of Neuroeconomics?

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neuro economics and neuro accounting

Neuro-economics and Neuro-accounting

Sudipta Basu, John Dickhaut, Kevin McCabe and Greg Waymire

neurons and neuroeconomics

Neurons and Neuroeconomics

Problems, Humility and Promise

what are the issues
What are the issues?
  • What is the goal of Neuroeconomics? (Controversial)
  • What is the fundamental building block of Neuroeconomics?
  • What does understanding the building block tell us about possible changes that may occur in the way we study economics and even accounting?
  • What is a brief overview of results to date?
what is the goal of neuroeconomics controversial
What is the goal of Neuroeconomics? (Controversial)
  • To understand the determination and formation of price and the design of economic institutions.
    • Sounds like traditional economics so why bother.
    • The “as if” assumption is rampant in evaluation of formation of price as well as assessments of economic institutions.
what is the as if assumption
What is the “as if” assumption?
  • Traditionally Embodied by Expected Utility Theory
    • Life is a gamble. All anyone ever does is choose among gambles.
    • A gamble described by outcomes,O, and probabilities of those outcomes, P.
      • O={o1,o2,….oN}
      • P={p1,p2,….pN}
  • What is the scope of this theory?
    • Are there restrictions on types of gambles being evaluated?
    • Are there restrictions on the types of animals doing the evaluating?
what is the theory
What is the theory?
  • Let {G1,G2,…,GM} denote a set of gambles where

Gj =(Oj,Pj)

    • Completeness, Continuity, Compound Lottery Axiom, Monotonicity,Transitivity
    • Existence of Utility Functions s. t. the Gj selected is the one with the highest expected utility

Luce and Raiffa, Games and Decisions, 1957

what is believed wrong with this structure
What is believed wrong with this structure?
  • Literature on Violations
    • Allais, Ellsberg, Khaneman and Tversky,
    • Hyperbolic Discounting,
    • Fairness issues in Trade, Trust
  • Alternatives
    • Prospect Theory, Rank Dependent Utility Theory, Case Based Probabilities
  • Still Issues - Still “as if” -Do not really look at the things making the choices.
  • Brain structures.
important points to be made from and economics point of view
Important Points To Be Made(From and Economics Point of View)
  • How many neurons?
  • What are modeling alternatives if we consider a specific neuron to be an economic agent?
  • What is a key issue through which economics might aid neuroscience?
neuron cartoons
Neuron Cartoons



Two Neurons



Parts=Axons, Dendrites,Soma=Cell Body,Axon Hillock,Boutons,Plus

Regular Cell Parts

animations from the web
Animations from the web
  • Overall picture of neurons sending data to other neurons
  • Getting after specifics-The resting potential

more animations
More Animations
  • Action Potentials

Hodgkin, AL and Huxley, AF, and Katz, B (1952) Measurement

of current-voltage relations in the membrane of the giant axon of Loligo. ...

more animations13
More Animations
  • Action Potentials
more animations14
More Animations
  • Propagation of Action Potentials
more animations15
More Animations
  • What to do with all that Sodium?
  • But how does communication between neurons take place?
What does understanding the building block tell us about possible changes that may occur in the way we study economics and even accounting?
  • Neuronal Information Processing
  • Neuronal Information Processing and Homo Economicus
    • Risk Preference Instability Across Institutions: A Dilemma, Berg, Dickhaut, McCabe, PNAS 2005
  • Information Processing in Homo non-Economicus
    • Preference Reversals:The Impact of Truth-Revealing Incentives, Berg, Dickhaut, Rietz Under Review
  • Is there any relationship? How would you begin to assess?

What does understanding the building block tell us about possible changes that may occur in the way we study economics and even accounting?(continued)

  • Humility
    • Accountants are interested in optimal information structures for society to promote allocation of capital to the right resources.
      • Scratched the surface of understanding the neuron.
      • It is complicated.
      • 100 Billion Neurons
      • Probably far from understanding how choice is made at a neuronal level and how institutions should be chosen.
brain atlases
Brain Atlases
  • Places to look for pictures of brain structures.
    • Google Images
    • Brain Atlases on Google

data gathering techniques
Data Gathering Techniques
  • Single Cell Recording
  • Positron Emission Tomography
  • fMRI
  • Galvanic Skin Response (SCR)
  • Heart Rate (HR)
  • Lesioned Subjects
1) Tremblay, L., and W. Schultz. “Relative reward preference in primate orbitofrontal cortex.” Nature 398 (April 1999): 704-708.
  • Monkies
  • Single Cell Recording
  • Establish Preferences of Monkies (Raisons, Apples, Cereal)
  • Ventromedial Neurons

differentially activate for preferred element in a pair


2)Fiorillo, CD., N. Philippe N., P. Tobler, and W. Schultz, “Discrete Coding of Reward Probability and Uncertainty by Dopamine Neurons.” Science 299 (March 2003): 1898-1902.

  • Monkies
  • Single Cell Recording
  • Ventral Tegmental Area
  • 5 lights related stochastically to likelihood of a reward
  • Ventral Tegmental Area records both likelihood (at cue)and surpise of reward(when rewarded).

Knutson, B., G.W. Fong, S. M. Bennett, C. M. Adams, and D. Hommer, “A region of mesial prefrontal cortex tracks monetarily rewarding outcomes: characterization with rapid event-related fMRI.” NeuroImage 18 (February 2003): 263-272.

  • Humans
  • fMRI
  • Stimulus Signal of reward-Press Button-Dollar Reward
  • Anticipation=Nucleus Accumbens
  • Reward Gains=Mesial Prefrontal Cortex

O’Doherty, J., P. Dayan,J. Schultz, R. Deichmann, K. Friston, and R. Dolan, “Dissociable Roles of Ventral and Dorsal Striatum in Instrumental Conditioning.” Science 304 (April 2004): 452-454.

  • Humans
  • fMRI
  • Subject Choice vs. Computer Choice
  • Computer and Subject=

Ventral Striatum=Critic

Only Subject=Dorsal Striatum Agent


The somatic marker hypothesis: A neural theory of economic decision • Games and Economic Behavior, Volume 52, Issue 2, 1 August 2005, Pages 336-372 Bechara, A.; Damasio, A.R.

  • Humans
  • Lesioned (Amygdala, Ventromedial Cortex) vs Non-Lesioned
  • IGT
  • Lesioned Performed more poorly, Less emotional activity in terms of GSR anticipatory vs. actual choice.
Platt, M.L., and P.W. Glimcher. “Neural correlates of decision variables in parietal cortex.” Nature 400 (July 1999): 233-238.
  • Monkies
  • Single Cell Recording
  • Monkeys choose saccade left or right.
  • Behaviorally choose highest expected payoff
  • LIP area of brain sensitive to changes in expected payoffs.

Dickhaut, J., K. McCabe, J. Nagode, A. Rustichini, and J. Pardo., “The impact of the certainty context on the process of choice.” Proceedings of the National Academy of Science 6 (March 2003): 3536-3541. AndRustichini, A., J. Dickhaut, P. Ghirardato, K. Smith, and J.V. Pardo, “A brain imaging study of the choice procedure.” Games and Economic Behavior 52 (2005): 257-282.

  • Humans
  • Numerically Displayed Gambles
  • Invokes decision policies and/or cutoffs
  • Parietal

McCabe, K., D. Houser, L. Ryan,V. Smith and T. Trouard, “A Functional Imaging Study of cooperation in Two Person Reciprocal Exchange.” Proceedings of the National Academy of Sciences of the United States of America 98 (2001): 11832-11835.

  • Humans
  • Humans vs. Computer
  • Theory of Mind for Human vs. Computer
  • Paracingulate Cortex

King-Cassas, B., D. Tomlin, C. Anen, C.F. Camerer, S.R. Quartz, and P.R. Montague, “Getting to Know You: Reputation and Trust in a Two-Person Economic Exchange.” Science 308 (2005): 78-83.

  • 2 Humans
  • fMRI
  • Trust game-2 people in a scanner
  • Show that coterminous activations in Middle Cingulate
  • Caudate of receiver anticipates the behavior of the investor.

De Quervain, J., U. Fischbacher, V. Treyer, M. Schellhammer, U. Schnyder, A. Buck,and E. Fehr, “The neural basis of altruistic punishment.” Science 425 (October 2003): 785-791.

  • Humans
  • Trust with Costly Punishment
  • Caudate reflects enjoyment of punishment
  • Ventromedial evaluations.
price formation market efficiency and drift agent and neuronal based theory

Price Formation:Market Efficiency and Drift, Agent and Neuronal Based Theory

John Dickhaut, Baohua Xin

a neuroeconomics motivation
A Neuroeconomics Motivation

What is missing currently?


Institutional Performance

Two background studies.

how new information about reward is evaluated



denotes a grape reward.

denotes an apple reward.

How new information about reward is evaluated.



Can infer preferences from neuronal firing.

Response time faster for more preferred item.

Wolfram Schultz, 2002

how new information about relative frequency is evaluated
How new information about relative frequency is evaluated.
  • Five cues each with a differing probability of reward p=0.0,0.25,0.50,0.75,1.00
  • Neurons in ventral tegmental area.
  • Neurons code relative frequency.

Fiorello Et. al, 2004

what is meant by price formation

V.L. Smith, JPE,1962

What is meant by Price formation?
  • Smith article shows competitive equilibrium can be attained in a Double Auction.
    • What is a double auction?
  • Price formation would be a model that produces the second graph in light of individual subject information.
    • What is that information in the double auction?
original formulation gerstad and dickhaut
Original Formulation Gerstad and Dickhaut
  • K buyers and K sellers.
  • Buyers have reservation values and sellers have costs to produce to order.
  • Agents want to make trades based on what they see going on in the auction.
  • Each buyer can make a bid, each seller an ask or accept an outstanding bid (seller) or ask (buyer).
  • Each bid or ask is based on the agent’s reservation value or cost and the likelihood the bid or ask will be taken.
big issue 1 determination of likelihoods in this structure
Big Issue 1-Determination of likelihoods in this structure.

Do you see any relationship between this type of assumption

and what we have said about the brain?

big issue 2 decentralization who moves first
Big Issue 2-Decentralization-Who moves first?

The next agent in the auction is probabilistically

related to that agents expected profit compared

to other agents.

Does this look anything like what we have talked about so far?

accounting fish to fry
Accounting fish to fry
  • A central question that can be used of so called event studies that examine the impact of information in prices is
    • How do the sequence of prices arise?
    • And in particular is it possible to build a mechanism that actually shows how prices emerge?
    • Can we use our structure to produce information efficiency as well as drift?
new things in this environment
New things in this environment
  • N agents with CARA utility Functions.
  • A single risky asset traded with 2 payoffs, Hi and Lo.
  • At any point in time agents can determine a valuation based on the agents utility function and differential information.
  • Agents can both buy and sell.
  • Explicitly build in endowment constraints.
discussion of valuation determination
Discussion of Valuation Determination

Where does something like this go on in the brain? Any evidence

it can happen