Armin Falk and Bernd Weber

1
Neuroeconomics Part I Introduction

• Armin Falk and Bernd Weber
• Universität Bonn, SS 08

2
Overview

• Introduction
• Methods
• Neuroanatomy - macro- and microanatomy of the
  human brain
• Visit the Institute of Anatomy
• Neurophysiology - how neurons communicate
• Methods of cognitive neuroscience (EEG, fMRI,
  PET, MEG....)
• Visit LifeBrain - NeuroCognition Lab
• Important neuroeconomics papers (see below)

3
Papers (to be completed)

• The Neural Basis of Economic Decision-Making in
  the Ultimatum Game Alan G. Sanfey, James K.
  Rilling,Jessica A. Aronson, Leigh E. Nystrom,
  Jonathan D. Cohen, Science 13 June 2003, vol.
  300. no. 5626, pp. 1755 - 1758
• Getting to Know You Reputation and Trust in a
  Two-Person Economic Exchange, Brooks King-Casas,
  Damin Tomlin, Cedric Anen, Colin F. Camerer,
  Steven R. Quartz, P. Read Montague, Science,
  2005, vol. 308, pp. 78-83.
• Neuroeconomics How Neuroscience Can Inform
  Economics, Colin F. Camerer, George Loewenstein,
  Drazen Prelec, Journal of Economic Literature,
  2005, vol. 43, 9-64.
• Neuroeconomics Why economics needs brains, Colin
  F. Camerer, George Loewenstein, Drazen Prelec,
  Scandinavian Journal of Economics, 2004, vol.
  106, no. 3, 555-79.
• Oxytocin increases Trust in Humans, Michael
  Kosfeld, Markus Heinrichs, Paul Zak, Urs
  Fischbacher and Ernst Fehr, Nature 435, 2 June
  2005, 673-676.
• The Neural Basis of Altruistic Punishment,
  Dominique J.-F. de Quervain, Urs Fischbacher,
  Valerie Treyer, Melanie Schellhammer, Ulrich
  Schnyder, Alfred Buck, Ernst Fehr, Science 305,
  27 August 2004, 1254-1258.
• Strategizing in the Brain, Colin F. Camerer,
  Science, 2003, vol. 300, pp. 1673-75.
• Social Comparison Affects Reward-Related Brain
  Activity in the Human Ventral Striatum, K.
  Fliessbach, B. Weber, P. Trautner, T. Dohmen, U.
  Sunde, C. E. Elger, A. Falk, Science, 2007, Vol.
  318, Issue 5854, 1305 1308.
• Unfair pay and Stress, Falk, Menrath, Kupio and
  Siegrist, Discussion paper.

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What is Neuroeconomics?

• General Neuroeconomics combines methods from
  neuroscience and economics to better understand
  how the human brain generates decisions in social
  and economic contexts
• Marriage of neuroscience methods with
  experimental economics methods
• Definition (Laibson) Neuroeconomics is the study
  of the biological microfoundations of economic
  cognition.
• Biological microfoundations are neurochemical
  mechanisms, like brain systems, neurons, genes,
  heart rate, skin resistance, and
  neurotransmitters.
• Economic cognition includes mental
  representations, emotions, expectations,
  learning, memory, preferences, decision-making,
  and behavior.

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Neuroeconomists

• About 100-200 neuroscientists and economists are
  actively working in this new field.
• Its roughly an even mix.
• This is in contrast to behavioral economics,
  where its a one-sided game (mostly economists
  and very few psychologists).

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Neuroeconomics Behavioral Economics

• Behavioral economics developed alternative models
  of economic behavior.
• Prospect theory, hyperbolic discounting, learning
  models.
• Fairness and reciprocity models.
• These models are black box models. They aim to
  predict behavior better but there is no ambition
  to understand the minds internal processes that
  generate the behavior.
• Questions
• Are components of behavioral models represented
  in brain structures?
• Can insights into how the brain works improve
  economic modeling?
• Can those insights discriminate between
  alternative models?

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Why is Neuroeconomics so fascinating?

• Brain research has made great progress during the
  past decade, largely due to noninvasive
  techniques that allow observing the brain while
  it is active.
• Systematic study of the relation between behavior
  and brain processes in healthy human subjects is
  possible.
• Possible to provide brain evidence for standard
  economic theory, allows deeper understanding of
  (behavioral) economics results
• Provide genuinely new insight into the
  neurobiological determinants of human behavior
• and this is genuinely interesting and exciting in
  itself

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What is the goal of neuroeconomics? Analogy to
organizational economics (Camerer EJ 2007)

• Until 1970s theory of the firm was a radically
  reduced form model of how capital and labor are
  combined to produce output. This model neglects
• principal-agent relations
• Gift exchange
• Efficiency wages
• Hierarchy and authority
• Communication networks
• Etc
• Nevertheless a useful simplification for deriving
  industry supply curves and doing macroeconomics
• but clearly inapproapriate for a host of
  interesting questions

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Opening the black box of the firmContract theory
10
Opening the black box of the human
brainNeuroeconomics (See Camerer 2007)
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Brain evidence provides a deeper understanding of
behavioral economics results

• Are social preference phenomena better modelled
  as preferences or as bounded rationality?
• One possibility to answer this question is to
  examine whether the brains reward mechanisms are
  activated if people make other-regarding choices
• Example ultimatum game

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Neural Basis of Responder Behavior in the
Ultimatum Game(A. G. Sanfey, J. K. Rilling, J.
A. Aronson, L. E. Nystrom, J. D. Cohen, Science12
13 March 03)

• Responders brain activations are measured by
  fMRI in a 10 UG.
• A responder faces each of three conditions ten
  times.
• Offers from a (supposed) human partner
• Random offers from a computer partner
• Money offer (there is no proposer here)
• Research Questions Which brain areas are more
  activated when subjects face
• fair offers (3-5) relative to unfair offers
  (1-2).
• the offer of a human proposer relative to a
  random computer offer.
• Method (very simplified)
• Regression of activity in every voxel (i.e, 3D
  Pixel) in the brain on the treatment dummy (i.e.,
  unfair offer dummy, human proposer dummy)

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Details of the Experiment
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Differences in brain activity between unfair and
fair offers from a human proposer
dorsolateral prefrontal cortex.
Dorsolateral prefrontal cortex.
Bilateral anterior insula and anterior cingulate
cortex.

• What you see Image of voxelwise t-statistic
  (red) is overlaid on top of a structural brain
  image (gray).

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Results

• Regions showing stronger activations if subjects
  face unfair human offers relative to fair human
  offers (the same regions also show more
  activation if the unfair human offer is compared
  to unfair random offers).
• Bilateral anterior Insula, anterior cingulate
  Cortex
• Emotion-related region
• Insula also has been associated with negative
  emotions such as disgust and anger.
• Dorsolateral prefrontal Cortex (DLPFC)
• Cognition-related region
• Associated with control of execution of actions
• Associated with achievement of goals.
• Unfair offers are more likely to be rejected if
  insula activation is stronger.

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Insula activation is related to unpleasantness

• Higher for offer of unfair person.
• Higher for more unfair offers.
• Higher for people who reject. (unclear Is
  activation the cause of rejection or a byproduct?)

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General procedure

• Observe subjects brains when they are in a
  decision situation.
• Find the voxels which are particularly active in
  particular situations.
• For example Unfair vs. fair offers by humans.
• Interpret the observed activations by relating
  the results to studies that observe activations
  in the same brain regions. (Should be done ex
  ante.)
• Relate the observed brain activation with
  behavior.

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What does this procedure rely on?

• Brain regions are functionally specialized. At
  least, brain functions are not homogeneously
  distributed across the brain.
• Working parts of the brain show some kind of
  activity.
• This activity is measured with fMRI.

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• Neuroscience Methods
• Topics in Neuroeconomics
• Preferences
• Decision-making under risk and uncertainty
• Game theory and social preferences

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Revealed preferences

• Economists early doubts about the rationality of
  choice (see quote)
• But fear that unstable and unrational complex
  (emotions, instincts, impulses,) of influences
  underlying human choice cannot be measured
  directly
• Economic approach revealed preference theory
• Crucial assumption unobserved utilities are
  revealed by observable choices
• Breakthroughs in neuroscience feelings and
  thoughts can be measured directly

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A Timeline of Neuroscience (Methods)Ward (2006)

• Phrenology (Gall, Spurtzheim)
• Nerve cell described (Purkinje 1837)
• Lesion patients (Broca 1861), functional
  localization
• Electric current in dog cortex causes movement
  (Fritsch, Hitzig 1870)
• EEG (Berger, 1929)
• Action potential (Hodgkin Huxley, 1938), single
  cell rec.
• CT (Hounsfield, 1973), MRI (Lauterbur,1973),
  imaging
• PET (Reivich et al., 1979), measure blood flow
• TMS (Barker et al.,1985), noninvasive stimulation
• fMRI (Ogawa et al., 1990), measure BOLD

1800 1820 1840 1860 1880 1900 1920 1940 1960 1980
2000
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Research with human subjects

• Studying humans with lesions
• Associated deficits provide information about the
  function of the lesioned brain area.
• Observing the brain
• indirect measures (psychophysiological
  measurements as skin conductance, heart rate)
• Brain Imaging (EEG, PET, fMRI)
• Pupil dilation -gt mental effort
• Blood pressure, heart rate, skin conductance -gt
  anxiety
• Stimulating the brain
• Transcranial Magnetic Stimulation TMS
• Enables a controlled, spatially and temporally
  limited, stimulation or inhibition of brain
  areas.
• Psychopharmacological interventions
• Manipulation of neurotransmitter systems or
  hormone systems.

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Lesion studies

• Naturally occurring lesions
• Accident, stroke, brain tumor.
• Allows to determine that a particular function is
  processed independently from other functions.
• Allows to determine causally that a particular
  region is critical for the performance of a
  particular task.
• Problem
• It is often difficult to determine the affected
  brain region

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Results gained with lesions

• Broca found an area that is critical for speech
  production.
• Humans with lesions of the amygdala lose
  affective (i.e. emotional) meaning.
• Hippocampus removal prevents experiences from
  being encoded in long-term memory.

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Phineas Gage

• Explosion pushed iron up through the top of the
  scull.
• He survived.
• He was intellectually rather unaffected by the
  accident.
• He was unable to make reasonable decisions.

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Electro-encephalogram (EEG)

• Measures electrical potentials at the scull,
  caused by neural activity.
• Very good temporal resolution but poor spatial
  resolution.
• Large number of repetitions of the same situation
  is necessary.
• Interior brain activity is not directly recorded
• Further limits
• Eye movement creates also electric activity.
• In some regions neurons are not aligned and
  activity can cancel out.
• Not well suited for most economic experiments.

128 electrode array
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Magnetoencephalograghy (MEG)

• Rather new method, based on measuring the
  magnetic field generated by neural activity.
• Advantages in comparison to EEG
• Signal unaffected by skull.
• Good spatial resolution (2-3 mm).
• Disadvantages in comparison to EEG
• Cannot detect signals from deeper brain
  structures.
• Expensive.

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Positron Emission Tomography (PET)

• A radioactive substance is injected into the
  blood.
• This substance emits positrons.
• These positrons decay, together with electrons.
• PET detects the brain area where this decay
  occurs, i.e., it detects the areas into which the
  radiation went.
• Variants
• Glucose with radioactive fluorine.
• Water with radioactive oxygen measures blood
  volume.
• Better spatial but poorer temporal resolution
  than EEG
• Limited to short tasks

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fMRI (Functional Magnetic Resonance Imaging)

• MRI is based on the principle that protons in a
  magnetic field align with the field. If the
  magnetic field is perturbed the direction of the
  protons is disturbed. When the protons are
  redirected in the magnetic field electromagnetic
  radiation is emitted and is detected by the
  scanner.
• fMRI uses the fact that hemoglobin (red blood
  cells) have different magnetic properties
  depending on whether there is little or much
  oxygen in the blood.
• Increased neuronal activity in the brain uses up
  oxygen such that initially the oxygen level in
  the activated area falls later on the fall in
  oxygen is overcompensated for when oxygen-rich
  blood moves to the activated area.
• BOLD-Signal (blood oxygen level dependent signal).

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Temporal resolution of fMRI

• Blood flow has a laggedresponse to neural
  activity.(Hemodynamic response function HRF)
• Does still allow relatively good temporal
  resolutionbecause HRF is known.
• Shortest stimuli that have been detected with
  fMRI
• Blamire et al. (1992) 2 sec
• Bandettini (1993) 0.5 sec
• Savoy et al (1995) 34 msec

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How is fMRI data analyzed (will be discussed
later)

• Behavioral analysis
• Preprocessing
• Motion correction
• Normalizing
• Smoothing
• Statistical maps
• Individual analysis Which voxels correlate with
  the treatment, corrected for the homodynamic
  response?
• Group analysis Which voxels do so for many
  people.
• One has to take into account that multiple tests
  are conducted (corrected and uncorrected
  p-values).
• Time course in regions of interests
  (ROI-analysis).

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Block design and event related design

• Block design
• A experimental condition A is repeated several
  times, then the condition B is repeated several
  times,
• Event related design
• The experimental conditions A and B are presented
  on randomized order.
• This is in particular the case, when the timing
  of experimental conditions is determined
  endogenously (free decision time).
• Neuroeconomic experiments are usually event
  related, because the stimulus should
  unpredictable.

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Comparison of PET and fMRI

• Advantages of fMRI
• higher spatial resolution.
• higher temporal resolution.
• less invasive (no radioactivity).
• Advantages of PET
• Silent (auditory stimuli).
• Less movement artifacts when subjects speak.
• Sensitive to the whole brain. fMRI creates
  artifacts' in the neighborhood of cranial
  cavities (Schädelhöhle) (forehead, ear).
• Fewer repetitions necessary.
• PET almost dominated by fMRI. Latter two point
  are potentially relevant for economic experiments.

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Transcranial Magnetic Stimulation (TMS)

• Allows virtual lesions
• Non-invasive procedure debated
• A strong, magnetic impulse induces small currents
  (Ströme) in the brain (cortex).
• These currents create neural activity.

• Repeated stimulation at the same position can
  increase or decrease how strongly neuron respond.
• Temporally and spatially limited inhibition or
  activation of the brain function.

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Pharmacological Methods

• Placebo controlled administration of substances
  inform about the functioning of neurotransmitter
  or hormone systems.
• Neurotransmitter
• Dopamine, Serotonin, Noradrenalin
• Neurohormons
• Oxytocin
• Sexual hormons
• Testosterone, Estrogen
• Stress hormons
• Cortisol

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Other methods

• Single Neuron Measurement
• Implantation of electrodes into the brain
• While fMRI measures cumulative activity of
  thousands of neurons, each electrode measures a
  single neurons activity
• Very invasive, therefore used on humans only if
  neurosurgery inevitable due to epilepsy, and on
  animals
• Psychopathology
• Various illnesses have been associated with
  specific brain areas, some illnesses progress
  along a localized path in the brain
• Chronic mental illnesses (schizophrenia),
  degenerative diseases of the nervous system (PD),
  developmental disorders (autism)
• Inferences can be made about the role of specific
  brain areas in brain functioning

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Overview of neuroscientific methods
38
Animal research

• Many brain areas in humans and animals have
  similar structures.
• Its possible to produce addicted rats.
  Addiction is created in that part of the brain
  which we share with other mammals.
• Learning.
• Decision taking in monkeys.
• Creating lesions and single cell recording (i.e.
  measuring the electrical potentials of single
  neurons) is possible in non-human primates but
  not in healthy humans.

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Controlled lesions

• Allows to determine causally whether a particular
  brain region (or connection between regions) is
  essential for a particular function.
• Examples
• Experimental destruction of both amygdalas in an
  animal tames the animal, making it sexually
  inactive and indifferent to danger like snakes or
  other aggressive members of its own species.
• Knocking out the gene that makes a key protein
  for amygdala function makes rats relatively
  fearless.

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Topics in Neuroeconomics PreferencesThe
following is taken from the Camerer et al. paper
Neuroeconomics Why Economics Needs Brains
(Camerer, Loewenstein, Prelec, 2004,
Scandinavian Journal of Economics)

• Revealed preference approach cannot tell the
  whole story
• Al and Naucia both refrain from buying peanuts at
  a certain price
• Common disutility?
• Al has a fatal allergy (inelastic demand) while
  Naucia once simply ate too many peanuts (would be
  willing to eat some again for a certain price)
• Biological state-dependence vs. rational choice
• There is no low enough price to induce Al buying
  peanuts
• Tradeoff between sleep utility and risk of
  plowing into a tree utility?
• Dead sleeper with U(sleep)gtU(plowing into
  tree)???
• Choice as a result from interaction of multiple
  systems (automatic biological system, controlled
  cognitive system)

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Preferences

• Preferences are state-dependent
• Whether I like having icecreme depends on the
  season
• Homeostasis (Gleichgewicht der Körperfunktion)
• Different types of utility
• Kahnemann remembered utility, anticipated
  utility, choice utility, experienced utility
• Different types do not always coincide
• in particular for rare but important decisions
• Contradictory to standard analysis of welfare,
  which assumes that choices anticipate experience
  perfectly
• Examples compulsive shoppers (revealing choice
  utility) buy stuff they dont use (experience
  utility) children drug and addicts
  (craving/wanting consumption/choosing not
  pleasurable)
• Presumption in neurosciences different types of
  utility are produced in different brain regions

42
Preferences

• Utility of money
• Economics People are expected to value money for
  what it can purchase -gt indirect utility of
  income
• Neuroeconomic evidence suggests that money can be
  directly rewarding -gt direct utility of income
• Monetary rewards seem to activate the same brain
  region (dopaminergic neurons in the midbrain)
  that is active for a wide variety of rewarding
  experiences
• Possible explanation for why workaholics and very
  wealthy people keep working even though the
  marginal utility of goods purchased with their
  marginal income is very low
• Pain of paying..., credit cards or preference for
  fixed payment plans rather than marginal-use
  pricing

43
Flat rates

• Many studies show that consumers choose flat
  rates even though marginal use schemes would be
  optimal, i.e., cost less (telephone, fitness
  studio)
• Explanations
• Risk aversion (knowing the cost vs. uncertain
  cost)
• Mental accounting and neuro perspective (pain of
  paying), see, e.g., Prelec/Loewenstein (1998)
• They ask Ss whether they enjoy using different
  products more when paying flat rates or marginal
  use schemes 48 percent prefer flat rate, only 19
  percent prefer marginal use scheme (fitness
  studio, phone, traffic etc.)
• Laziness
• Overestimation effect (wrong subjective prob. of
  using a particular good)
• Commitment device

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Preferences

• Source of income
• Economics utility of income is independent of
  its source
• Neuroeconomic evidence earned money is more
  rewarding than unearned money
• Greater activity in the striatum (midbrain
  region) for earned income (Zink et al 2004)
• Implications for welfare and tax policies?
• Workfare vs. welfare

45
What is better welfare or workfare?A little
digression

• Workfare programs introduced in several countries
• Unlike regular public assistance, workfare
  requires recipients to spend time on mandatory
  activities such as community work
• Economic theory predicts that workfare increases
  the incentive for benefit recipients to seek
  regular employment, because the work requirement
  reduces the attractiveness of being on public
  assistance
• However, workfare is often claimed to be unfair
• Can Neuroeconomics provide additional support?

46
This study (Falk, Huffman and Mierendorff 2006)

• Study the incentive effects of workfare
• Assess potential political support/resistance
  with respect to workfare
• Explore motives behind voting for/against
  workfare

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1. Incentive effects

• Real effort task
• Task has no intrinsic value
• Experiment captures essential tradeoff between
  effort cost and wage
• Elicit reservation wages

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Count the number of zeros How many of these
would you do for X Euro?
Sheet 1
49
Phases of the experiment

• Phase 1 try the task
• Phase 2 choice tables
• Subjects fill in choice tables
• Phase 3 work/payment
• Subjects are paid and leave the lab, if on
  welfare
• Subjects work if employed or on workfare
• Paid and allowed to leave as soon as they are done

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Example choice table
welfare
regular job
51
Example choice table
regular job
workfare
52
Work outcomes and payment

• Subjects know how outcomes are determined
• One row in one table is randomly selected
• Subjects choice for that row is implemented
• e.g. 4 Euros and leave the lab immediately
• or, 6 Euros after completing 5 sheets
• Incentive compatible
• Payment conditional on completing required
  sheets receive money and leave when finished

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Results
Incentive effects are significant 5
sheets (plt.0001) 10 sheets (plt.0051) Wilcoxon
Rank test.
Euro
54
2. Political Acceptability

• To what extent do people support workfare?
• What are their motives?
• We study this in a setting where some
  individuals, type A, must work and pay taxes to
  support individuals on welfare.
• Other individuals, type B, choose whether to
  work, or to go on welfare and collect money from
  the As.
• Before Ss know their roles, they vote on whether
  or not to attach a work requirement to welfare
  benefits
• Voting behind the veil of ignorance

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Phases of the experiment

• Voting
• Ss are assigned to groups of 3
• Each group consists of two A and one B
• As will potentially earn 6 Euros for 10 sheets,
  or only 4 Euros if B does not work (welfare
  support)
• Ss vote whether to impose a work requirement, if
  B chooses not to work
• Types are revealed and Bs make a choice
• Work, and earn 6 Euros by doing 10 sheets
• Receive 4 Euros from the As, potentially for 0
  sheets
• Work and payment
• Ss on welfare are paid and leave immediately
• Ss who are employed, or on workfare, begin work
• Ss are paid and can leave as soon as they have
  completed the required task units

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Summary of possible outcomes
57
Is Workfare Fair?
58
Substantial support for workfare
All groups implement workfare among 23
B-players, 20 choose regular job
59
Why do people support workfare?
Self Interest 16
Both 15
Social Motives 56
Categorized responses to free-form
questions. Self-interest workfare gives B an
incentive to work. Social motives inequity
aversion, fairness, reciprocity
60
Conclusions/end of digression

• Workfare has the predicted impact on reservation
  wages
• We find substantial support for workfare
  (importance of fairness)
• Neuroeconomics relevant?
• Revenge is sweet (people like to punish
  defectors, see deQuervain 2006) may be one
  reason why people vote in favor of workfare
• People are better off if they receive money as a
  return for working (Zink et al. 2004)

61
Preferences

• Addiction
• Models of rational addiction current utility
  depends on a stock of previous consumption,
  consumers understand the habit formation and
  respond to future prices
• The rational addict should buy drugs in large
  quantities at discounted prices and self-ration
  them
• Is addition rational?
• Many addicts quit and relapse regularly
• Buy small packages struggle of two systems?
• Neuroeconomic evidence addictive substances seem
  to initiate the reward mechanism in the old
  part of the human brain
• Substances also potentially addictive for rats
• No contradiction of rational model, but shows
  that rational planning not necessary to create
  addictive phenomena

62
Decision-making under risk and uncertainty Risk
and ambiguity

• Economics risk is equated with variation of
  outcomes one-dimensional
• Neuroeconomic evidence risk has more than one
  dimension
• Potential catastrophic outcomes that are
  difficult to control are perceived as more risky
  (controlled for statistical likelihood) -gt fear
  of flying
• Driven (amongst others) by fear responses
  (amygdala)
• Ambiguity missing information about
  probabilities people would like to know but dont
• Activation of insula is different when people
  choose certain money amounts compared to when
  they choose ambiguous gambles (insula processes
  information like physical pain, hunger, pain of
  social exclusion,)

63
Decision-making under risk and uncertainty Risky
choice

• Involves an interplay of cognitive and affective
  processes
• Experimental evidence
• Two groups of subjects normal subjects and
  subjects with prefrontal cortex (PFC) damage
  (i.e. a disconnection between cognitive and
  affective system)
• Subjects repeatedly had to draw cards from
  different decks (different with respect to
  expected value, range of outcome), learned the
  composition of decks via trial-and-error.
• Skin conductance reactions (fear) to large losses
  identical among both groups
• Normal subjects learned to avoid risky bad
  decks while prefrontal-damage patients returned
  to bad decks shortly after experienced losses
• Imaging studies show that gains and losses
  produce different levels of activation in
  different regions of the brain
• Support for prospect theory (Kahnemann/Tversky)

64
Decision-making under risk and uncertainty
Gambling

• Economic puzzle people both demand insurance and
  gamble at the same time
• Including emotions and other neuroscientific
  insights might help
• Studies of pathological gamblers genetic
  disposition mainly male
• Blocking of opiate receptors in the brain reduces
  the urge to gamble

65
Game theory and social preferences

• Assumption among neuroscientists there is a
  specialized mind-reading area in the human
  brain, that controls reasoning about what others
  believe and might do
• Social preferences
• Cooperating subjects show increased activation in
  Broadmann area 10 (mind reading area), autists
  are assumed to have deficits in that area and
  often have trouble figuring out what other people
  think and believe
• Sanfey, Rilling et al. fMRI study of ultimatum
  bargaining see above

66
Concluding remarks

• Neuroscience measurements offer more reliable and
  unbiased data in many cases (e.g., compared to
  certain survey data or self-reports)
• Neuroeconomic research might give better insights
  for example into consumption choices and
  underlying mechanisms, nature of behavior
  studying unobservable intermediate variables
  (beliefs, utility)
• Neuroscience can possibly show that economic
  choices that are considered to be different in
  economic theory but that use the same brain
  circuitry (e.g., insula cortex is active when
  subjects reject low offers in ultimatum game and
  when choosing an ambiguous gamble)
• Neuroscience can add precision to functions and
  parameters in standard economic models

67
Final comment

• Neuroeconomics is important and will stay if it
  produces scientifically valuable knowledge
• This is true irrespective of whatever notion
  someone holds of what economics is about

68
Unfair pay and Stress(Falk, Menrath, Kupio and
Siegrist, 2008)

• Does perceived unfair treatment induce stress?
• Important to understand nature of social
  preferences
• Negative emotions and stress caused by unfair
  treatment are hypothesized to be a main reason
  for reciprocation (Adams 1964, Fehr 1999, Falk
  and Fischbacher 2006) reduced by the act of
  reciprocation (see recent neuro-imaging evidence,
  see beow)
• Enhances our understanding of the effects of
  income inequalities, which are widening in modern
  western economies
• Unfair pay may adversely affect work motivation,
  well-being and health status of employees
  (questionnaire studies, epidemiological studies)

69
Health and the workplace

• Specific features at the workplace enhance or
  reduce employees health through psychosocial
  stress-related mechanisms
• These features are related to firm organization,
  modes of payment etc.
• Hypothesis Effort-reward imbalance (unfairness)
  at work increases the risk of stress-related
  diseases (e.g. coronary heart disease,
  depression) and health-adverse behaviors
  (smoking, alcohol).
• By the year 2020 depression and coronary heart
  disease will be the leading causes of premature
  death and of life years defined by disability ...
  worldwide. (WHO and Murray and Lopez 1996)

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Design

• Stylized labor relation, one principal one agent
• Details of the experiment are all commonly known
• Agent produces revenue by working on a tedious
  task
• Counting zeros on sheets with zeros and ones
• 3 Euro for correct number 1 Euro for almost
  correct number (deviation of plus/minus 1) zero
  Euro otherwise
• Agents work 25 minutes principals do not work at
  all
• Total revenue goes to the principal who allocates
  it between himself and the agent
• Before agent gets to know his share, he is asked
  about a pay he would consider as appropriate
• After agent is informed he has four minutes to
  think about a letter he would write to his
  principal
• These four minutes are used to recorded heart
  rate variability of agents (relative to baseline)

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Heart rate variability

• Heart rate variability has been chosen as a
  physiological marker in our experiment because of
  its sensitivity to recurrent experience of
  emotional stress
• Recent evidence from epidemiological
  investigations indicates that HRV is an early
  indicator of functional and structural
  impairments of the cardiovascular system, which
  increases the probability of future manifest
  coronary heart disease
• HRV is low if stress is high

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Three measures of unfairness

• Actual share payoff of agent/total revenue
• Discrepancy actual share/appropriate share
• Fairness on a 5-point Likert scale

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Results
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