Neuroeconomics Jaeseung Jeong, Ph.D Department of Bio and Brain Engineering, KAIST

Do animals make rational decision? Harper’s experiment 33 ducks throws bread-ball every 5 seconds (double speed) throws bread-ball every 10 seconds

The result is…

Animals do rational choices! Ducks achieve optimal solution within 90 sec. 22 : 11 throws bread-ball every 5 seconds throws bread-ball every 10 seconds

Homo Economicus: Rationality

Life is a full of choices Our daily life is full of choice and decision-making based on sensory data and a stored representation of world structure with action.

Economics has investigated decision-making Using Game theory 경제학, 오랫동안 의사결정과정을 탐구하다

Nash equilibrium In game theory, the Nash equilibrium (named after John Forbes Nash, who proposed it) is a solution concept of a game involving two or more players, in which no player has anything to gain by changing only his or her own strategy unilaterally. If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium.

Example: Prisoner’s dilemma

Frame theory: Humans are not rational! With Amos Tversky and Daniel Kahneman established a cognitive basis for common human errors using heuristics and biases and developed Prospect theory. Kahneman was awarded the 2002 Nobel Prize in Economics for his work in Prospect theory.

13 Anomalies: Preference reversal and temporal discounting A, B, C B, C, D Preference is not stable, constant, and consistent. The preference can be changed by the frame

Beauty contest game 이 문제는 100명에게 출제되었다고 가정한다. 0부터 100까지 각자 좋아하는 수를 하나씩 선택하게 하고 선택된 수의 평균의 2/3배에 가장 가까운 수를 선택한 사람이 승자가 되는 게임이다. 여러분은 어떤 숫자를 선택할 것인가?

Results: Beauty contest game

Average : 28.5 (79 persons) 2/3 of Ave. : 19.89 (안현서, 19)

Steps of reasoning

붕괴된 ‘Rationality’에 대한 신화 Homo Economicus ? 붕괴된 ‘Rationality’에 대한 신화

Ultimatum game: 최후 통첩 게임 PROPOSER RESPONDER

METHODS Ultimatum game: 최후 통첩 게임 PROPOSER RESPONDER

What happens in the Brain of subjects responding to the offer in the Ultimatum game?

Responder’s brain has been scanned during the Ultimatum game: unfairness aversion Responders rejected the offer Responders accepted the offer

Fair offers correlate with market integration (top), cooperativeness in everyday life (bottom)

Ultimatum game is a cognitive, emotional, and social game.

Experimental procedure

Behavioral Results: face-to-face interactions effects

fMRI/EEG ‘hyper-scanning’ to estimate social interactions

EEG hyperscanning Hyperscanning is a method by which multiple subjects, each in a separate EEG scanner, can interact with one another while their brains are simultaneously scanned. The hyperscanning technology for fMRI permits the study of the brain responses that underlie important social interactions. The technique has been developed by Read Montague of Virginia Tech over the past eight years, and already has undergone extensive preliminary testing.

EEG hyperscanning Client Client Hyperscan server and database Controller Controller

Responder decision (accept) Fair offer (5:5) Temporoparietal Frontocentral Proposer Proposer offer (5:5) Responder decision (accept) Responder Frontocentral Temporal

Important issues in this lecture What is Nash equilibrium? How is it determined for a game? What is the Nash equilibrium of the Beauty contest game? Actual participants’ decision/behavior in this game is quite different from the Nash equilibrium of the game. What are the implications of this discrepancy? What is the Nash equilibrium of the Ultimatum game? Why is the ultimatum game cognitive, emotional, and social? Actual participants’ decision/behavior in this game is quite different from the Nash equilibrium of the game. What are the implications of this discrepancy? What is fMRI/EEG hyperscanning? What are its advantages of this method?