In classical economic theory, the consumer is assumed to be a rational decision maker who makes choices to maximize his utility given his budget constraints. The consumer is also assumed to make intertemporal choices about savings, education, work effort, career and health care, after weighing in the opportunity cost of his funds. The classical economic model is modeled on the basic economic principles that consumers are rational and that they are equipped with immutable logic to further their best interests. As a natural corollary, classical economic thought would predict that consumers would save for their retirement, take only loans that they can afford to repay regularly over their lifetime, and consume the quantity of goods and services that balances their intertemporal budget constraints.
What then explains the apparently illogical behavior of consumers tossing coins into a slot machine without having any expectations of winning, or splurging their savings on holidays they can ill afford rather than saving for retirement, or even, successively refinancing their homes and indulging in conspicuous consumption while knowing fully well that either the unpredictable housing or labor markets makes repayment of debts very difficult? These decisions of consumers are not rational purchasing decisions and contrary to classical economic thought. This has led to an emerging field in economic thought and research, called neuroeconomics, that suggests that the interplay between the various centers of the brain play a part in the financial decisions that people make.
Neuroeconomics is an emerging transdisciplinary field, primarily neuroscience, psychology and economics to study how we make choices. It looks at the role of the brain when we evaluate decisions and how the brain categorizes risks and rewards. “Economics” in the field if neuroeconomics is to be interpreted in the broadest sense of any decision making process that involves making a choice from available alternatives.
Read my full draft paper on Neuroeconomics. Comments are welcome, as usual.