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Got Game?
Neuroeconomists reconcile the human factor with game theory
. . . by Nick Horton

Neuroeconomics is more than just a fabulous name for an independent major and a hi-fi way to study gambling. By using brain imaging techniques, neuroeconomists are quantifying why people don’t do what economists predict. It turns out that hormones often respond to and induce human predispositions toward trust, stinginess, and vindictiveness. They are what make us so damn quirky. The new field of neuroeconomics can finally test why humans violate game theory predictions.

Einstein never played dice and Pablo Picasso never got called an asshole
In 1994, two Nobel Prize winning economists banded together to form a hedge fund called Long Term Capital Management. They were supposed to be too smart to lose. Four years later they sank as poetically as the Titanic and had to be bailed out by the international banking community. The firm had controlled 100 billion dollars of U.S. assets.

Their tragic flaw was their disregard for human irrationality. After the crash of the Russian and Asian markets in 1997, investors did not rebound according to calculations. The equations collapsed under their extrapolations. This is the economist’s legend of Achilles–so powerful, so exalted, and yet so hopelessly imperfect. Is there salvation?

Game theorists see some action
Over the years, game theorists have derived incredibly sophisticated formulas for determining how people will act in certain situations. These have become the basis for microeconomic theory, the tools for modeling how people will behave in markets.

For example, given a choice to make an offer of a certain value to another, will an actor expect reciprocation? Say I give you a banana. If I were a game theorist, I would know whether you would a) give me back half b) give me back the finger c) let me lick the banana. The only problem with game theorists’ elaborate predictions is that they regularly don’t work. You might be so weirded out by my banana-gift that you shriek and blow your rape whistle.

Neuroeconomics utilizes the tools of neuroscience in trying to quantify the vexing irrationality of humans. Neuroscientists pay people to perform tests, like looking at pictures and answering questions, and then evaluate the subject’s brain activity with imaging equipment such as Magnetic Resonance Imaging (M.R.I’s). Neuroeconomists pay people to play the favorite games of game theorists, and then look at brain activity to elucidate the decision making process.

Pressing the right buttons
Here’s a popular game: Player One has $10 and can give any amount to Player Two. Player Two can accept or decline the offer. If Player Two accepts, they both keep the money. If Player Two rejects it, both lose all their money. According to game theory, this situation has an equilibrium: Player Two will accept whatever is offered since some money is better than nothing, so Player One will give the least amount possible, $1.

But if you put two players at a computer, recent experiments have shown that about half of players don’t fit the prediction. Player Two instead rejects measly offers, and Player One eventually learns to give bigger ones, up to half the money.

Neuroeconomists have recently discovered telling neurochemical signals that correlate highly with strategy. In some people, receiving low offers stimulates the part of the brain associated with disgust, causing these people to generally reject the stingy offers.

Other investigators studying the biological basis of trust have used a variation of the ultimatum game. In this game Player One gets $10 and can give a gift to Player Two. Whatever he sends is tripled, so a gift of $5 becomes $15. Player Two can then give money back or not. The standard equilibrium is that Player One just keeps the cash. But human players tend towards cooperation. Most people ended up sending around half of their holdings to the other player. Even though they were communicating by computer, the players empathized with the human on the other end and tried to gain their trust.

Researchers found that hormones seem to determine how trustful Player Two became. Oxytocin is a hormone produced in the brain that is well documented in regulating social behavior After receiving large gifts from Player One, Player Two’s oxytocin levels rose. The larger the gift, the more oxytocin. The more oxytocin, the more Player Two reciprocated.

But who is at the controls?
Economists have long known that people behave in ways that math can’t easily predict—that they exhibit emotions like trust and resentment. These findings expose the mechanisms behind some human reactions and decisions. How useful that knowledge is to economists may depend on how deterministic the mechanisms are. Can we classify populations as oxytocin-rich or oxytocin poor? And perhaps most intriguingly, who is making your decisions, you or your hormones? According to the experiment, higher oxytocin levels did not correspond to personality indicators. Niceness was not part of the trust cascade.

Either way, neuroeconomics promises to try to reduce you to as simple a set of variables as possible. By parsing apart the neurochemical variations on rational utilitarianism, economists may be able to squeeze the humanity back into their equations. It’s a last ditch attempt to explain why Thomas Nash never got a date, and it just might work.

Nick Horton B’04 will reduce you to as simple a set of values as possible.

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