What is Neuroeconomics?
Neuroeconomics combines neuroscience, psychology, and economics to understand how the brain makes decisions about value, risk, and reward. It uses brain imaging and computational models to reveal the neural mechanisms underlying economic behavior.
How it works
Traditional economics assumed that decisions result from rational utility maximization. Neuroeconomics showed that the brain uses multiple competing valuation systems: a model-based system (prefrontal cortex, deliberate calculation) and a model-free system (striatum, habitual reward learning). These systems sometimes produce conflicting signals, explaining why people make ‘irrational’ choices. Key findings include that the ventromedial prefrontal cortex encodes subjective value, the ventral striatum signals prediction errors, and the anterior insula signals anticipated losses.
Applied example
An fMRI study shows that when participants choose between an immediate small reward and a larger delayed reward, the ventral striatum activates strongly for the immediate option while the dorsolateral prefrontal cortex activates for the delayed option. The relative strength of these signals predicts the person’s choice, revealing the neural tug-of-war behind temporal discounting.
Why it matters
Neuroeconomics reveals that economic decisions emerge from competing neural systems rather than unified rational calculation, providing a biological foundation for behavioral economics.
