1. Ming Hsu Meghana Bhatt Ralph Adolphs Daniel Tranel Colin Camerer Neural Systems Responding to Degrees of Uncertainty in Human Decision-Making

2. What is Neuroeconomics Neuroeconomics seeks to ground economic theory in details about how the brain works. Adjudicate competing models Debates between rational-choice and behavioral models usually revolve around psychological constructs E.g. loss-aversion and a preference for immediate rewards. Before, these constructs have typically been unobservable. Provide new data and stylized facts to inspire and constrain models.

3. Example: Dual-self models A number of them in recent years Bernheim & Rangel 2004 Benahib and Bisin 2004 Benabou and Pycia 2002 Brocas and Carrillo 2005 Fudenberg & Levine 2005 Miao 2005 “This is consistent with recent evidence from MRI studies, such as McClure et al. [2004], that suggests that short-term impulsive behavior is associated with different areas of the brain than long- term planned behavior.” (Fudenberg & Levine) The notion of a dual-self has been around since Plato. Neuroscientific data new.

4. Tools of Neuroeconomics These (and other) tools enable us to study economic behavior at the neural level Functional magnetic resonance imaging (fMRI) Indirect observation of neuronal activity Temporal resolution: 2-3 secs Spatial resolution: 2-3 mm 3 Lesion patients Assess the necessity of brain region for certain behavior. Spatial resolution: varies with size of lesion. Modularity: this organizing principle of the brain is what allows us to use these tools.

5. Decision Making Under Risk and Ambiguity Ambiguity and ambiguity aversion is a long-standing topic in decision theory. Knight, Keynes, Ellsberg, and co. There is a large theoretical and empirical literature to draw upon. Schmeidler 1989 Gilboa & Schmeidler 1988 Camerer & Weber 1992 Invoked to explain a number of economic phenomena Home bias Equity premium Entrepeneurship The behavioral phenomenon is robust Camerer & Weber reviews experimental evidence.

6. Decision Making Under Risk and Ambiguity Ambiguity is uncertainty about probability, created by missing information that is relevant and could be known. Risk: Probability of head on a fair coin toss (known p, p = 0.5) Ambiguity: Probability of head on a biased coin of unknown bias (unknown p, p = ?) Ellsberg Paradox Urn A with n balls: n/2 red, n/2 green. Urn B with n balls: k red, n-k green (k unknown). Lottery: choose color, then ball from urn. If match, win $x. If mismatch, $0. Most people indifferent between choosing red or green in either urn A or urn B. Non-trivial proportion prefer urn A.

7. Approaches to Decision-Making Under Ambiguity Deny existence of ambiguity/risk distinction Models of ambiguity aversion Non-additive probabilities (capacities and Choquet integrals) set-valued probabilities (min-max) 2nd order prior and nonlinear weighting State dependent utility models Overgeneralization of a rational aversion to asymmetric information

8. What Neuroeconomics Can Say? Are risk and ambiguity distinguished at a neural level. If so, are the underlying neural circuitry Two systems Competing Independent One system Can this data be used to constrain the existing models.

9. fMRI Experiment Design Ellsberg type gambles Canonical example of decision-making under ambiguity World knowledge questions Control for possible framing effects of numerical information Closer analog of “real-world” decisions Adverse selection “Unnatural habitat” hypothesis. Betting against agent who has better information.

10. Ellsberg Type Questions

11. YesNo YesNo Real World Questions

12. Betting Against Informed Opponent 0

13. Ambiguous condition Risk condition Experimental Sequence  Self paced trials  48 trials total  Stimuli present for 2 sec after choice  Blank screen 4-10 sec  Each session about 10-15 min

14. Statistical Analysis of fMRI Data Image time-series Realignment Statistical parametric map (SPM) General linear model Parameter estimates Design matrix Template Normalisation SmoothingKernel Statisticalinference Gaussian field theory p <0.05 Courtesy of http//:www.fil.ion.ucl.ac.uk/spm

15. Data Analysis Linear model 64x64x32 time series Dummies d amb : ambiguity trial d risk : risk trial d post : post-decision interval  : Hemodynamic response convolution operator 1. Individual Analysis Ambiguity > Risk:  i amb >  i risk Risk > Ambiguity:  i risk >  i amb 2. Group Analysis: Random Effects  amb >  risk  risk >  amb

16. Results We find three main clusters of activation Amygdala: Fear of the unknown Lateral orbitofrontal (OFC): integration of Dorsal striatum They appear to separate into two processes A fast-responding, “vigilance” signal process (amygdala + OFC). A slower-responding, anticipated reward region (dorsal striatum). Constitute a generalized system for decision-making under uncertainty (including both risk and ambiguity). Behavioral experiments with lesion patients show that the OFC is necessary for distinguishing risk and ambiguity.

17. Ambiguity > Risk

18. Risk > Ambiguity

19. Correlation of Behavior with Imaging

20. Lesion Patient Experiment Lesion patients allow us to assess the necessity of a brain region for behavior. Two groups OFC lesion: location of damage overlaps with OFC activation. Control lesion: temporal lobe patients, lesions do not overlap with activation. Groups matched on IQ, verbal abilities, etiology.

21. Lesion Patient Experiment

22. Risk and Ambiguity Attitudes

23. Conclusion Our results suggest Risk and ambiguity are product of a single system Produced by two possibly competing processes To distinguish between levels of uncertainty With ambiguity and risk being limiting cases The OFC is necessary for proper functioning of the system.

24. Future Research Behavioral Typing (Ellsberg 1967) There are those who do not violate the axioms, or say they won’t, even in these situations; such subjects tend to apply the axioms rather their intuition. Some violate the axioms cheerfully, even with gusto. Others sadly but persistently, having looked into their hearts, found conflicts with the axioms and decided, in Samuelson’s phrase, to satisfy their preferences and let the axioms satisfy themselves. Still others tend, intuitively, to violate the axiom but feel guilty about it and go back into further analysis. Further establish direction of causality Exogenously stimulate the amygdala. Look in special populations of striatal differences.

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