Finding Hidden Motives

One of this year’s Oscar-winning movies, The Big Short, tells the entertaining story of a ragtag bunch who foresaw and capitalized on the housing bubble of the mid-2000s. The factors contributing to economic bubbles and their collapses are complex and heavily debated, but getting a clearer picture of how they arise and how we might avoid them in the future would seem particularly important as our lives become increasingly intertwined by globalization—assuming, that is, that we don’t all want to go off grid like Brad Pitt’s character in the movie. One possible wrench in the works is human decision-making behavior. Standard economic theory rests on people being fully rational agents who have stable preferences and are motivated primarily by self-interest. Yet in reality, human beings can act irrationally, and many efforts are being made to try to incorporate findings from behavioral economics studies into macroeconomic models. The hope is that as we gain a better understanding of how people behave and why, the models will be able to better account for real world observations and perhaps more accurately predict changes in the economic landscape and how these might be modified. By combining economics, psychology, and neuroscience, neuroeconomics research is starting to gain insights into mechanisms in the brain that govern decision making about money and how social factors play into the process. A major way this is tested is by engaging people in various games that involve sharing money with others, and examining and sometimes altering their brain activity during the process. This has led to some interesting findings in recent years.