Neuroeconomics is an interdisciplinary topic which attempts to describe peoples decision making. It focuses on the study to find out how economic behavior influences the understandings of the human brain. It uses research methods which have adopted from different disciplines such as cognitive and social psychology, experimental and behavioral economics as well as neuroscience. It focuses on decision making, and uses different tools from all fields in order to avoid shortcomings which crop up from a single perspective approach.
Decision making under risk and uncertainty
A majority of decisions which people take involve some risk. Subjects such as economics and psychology normally explain risk as uncertainty regarding many possible outcomes when the probability of each is known. Daniel Bernoulli through his theory of utility maximization was the first to explain decision making under risk. This theory states that people are rational and will have options which are based on expected utility they acquire from each of them. However, further research has confirmed certain short comings within this theory. For instance, people have a tendency to take or avoid risks. Some have the tendency to pay greater attention to small probabilities and ignore the large ones. Amos Tversky and Daniel Kahneman developed the prospect theory to include these observations.
A unique feature of human decision making is the strong dislike for possible loss. For instance, the possibility of losing investments in a particular project is considered higher than value of gaining the same amount as returns. One major controversy in having a clear idea about loss aversion is whether there is a single neural system to equate options and decides between these options or whether there are competing systems, with one being responsible for a logical comparison between options, while another is more emotional and is driven by a dislike for possibly negative results.
Apart from risk preference, another vital part of economics is intertemporal choices. These are decisions which include benefits and costs which get distributed over time. This type of research is used to study the expected utility which people allocate to events which take place at different time periods. In economics, one of the major models which is used to describe it is discounted utility. It considers that people have a steady time preference and allocate value to events, no matter when they take place.
Social Decision Making
Though most research related to decision making emphasize on people making choices by going out of social context, it is also necessary to take decisions which include social interactions. The different types of situations which scholars study include cooperation, punishment, cooperation etc.
Neuroeconomics takes into account social and emotional factors as well as neuroscientific methods to understand the relationship between neural mechanisms and economic behavior. Scholars are of the view that by using tools from different fields, neuroeconomics provides a clear understanding of decision making.