The Neuroeconomics of Time
By Daniel O'Connor of Integral Ventures, LLC
BusinessWeek recently ran an article promoting the new field of Neuroeconomics, claiming that it may "topple the notion of rational decision making." All by itself? That seems unlikely. But it is certainly a welcome addition to the overall economic dialogue.
The article mentioned some interesting findings that relate to the erosion of saving rates we've observed in developed economies.
One of the most fruitful avenues of neuro research is "time inconsistency." When people decide about the distant future, they're roughly as rational as economic textbooks assume. But when faced with a choice of whether to consume something now or delay gratification, they can be as impulsive as chimps. Harvard's Laibson coined "quasi-hyperbolic discounting" to describe the behavior, but that was just a label, not an explanation.
So Laibson and others scanned people inside MRI machines and discovered two parts of the brain operating in radically different ways. For decisions about the far-off future, the prefrontal cortex takes a long-term perspective. But for decisions such as whether to buy another chocolate bar right now, the limbic system takes over and demands immediate gratification. Last year the journal Science published the research by Laibson, Princeton University neuroscientists Samuel M. McClure and Jonathan D. Cohen, and Carnegie-Mellon University economist George Loewenstein.
[Decision Science News offers this excellent profile of the research]
This relates to the fundamental trade-off for every household--consumption versus saving--and it reflects householders' preferences for allocating their scarce resources over time. Given a flow of (after-tax) income, householders can either use the money for current consumption or save it for future consumption. This saving, in turn, funds business investment in capital goods, which eventually increase the productivity of labor and the production of consumer goods for which householders have been saving. Every market participant engages in this sort of temporal trade-off with every market decision, regardless of the market role he or she is playing.
This temporal trade-off is known as time preference because it expresses a preferential relationship between a particular good now versus that same good in the future. It is considered by economists of the Austrian school to be the subjective origin of the interest rate, because the greater our valuation of a good in the present relative to our valuation of the same good in the future, the greater the interest rate must be to induce us to defer enjoyment of this good. All of which makes me wonder whether we might have in these research findings the beginning of a Neuroeconomics of Time.
Furthermore, the interest rate plays an axial role in everything from money supply to wealth distribution to debt accumulation to business cycles to ecological sustainability. Our preference for, and perception of, value over time is certainly one of the most important factors in the evolution of the market economy. It gave rise to our multi-tiered technological capital structure, it governs our natural resource management in relation to the temporal rhythms of our natural systems, and it shapes our social relations on a daily basis in ways we cannot easily discern. It will therefore be very interesting to explore the implications of this nascent Neuroeconomics of Time for these related economic issues.
BusinessWeek closes by asking:
Should economic policy satisfy the farsighted prefrontal cortex? Or should it sometimes indulge the impulsive limbic system?
These are normative questions worth considering in light of the positive evidence that monetary and fiscal policy makers in America have been shamelessly indulging our impulsive limbic systems for years... not to mention indulging their own.
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WANTED: CENTRAL BANKER. Seeking seasoned political economist with fully-functioning prefrontal cortex, excellent impulse control, and commitment to promote same in population-at-large. Knowledge of sustainable economic development a big plus.
© 2005 by Daniel J. O'Connor. All Rights Reserved.
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