Decision‐making and Neuroeconomics
Authors: Kalenscher Tobias 
Published: March 2009

Abstract

Decision‐making is the process of choosing one out of several alternatives. The study of decision‐making is inherently multidisciplinary and can be approached from many different angles. Traditional accounts in economics and biology have a normative flavour and prescribe, rather than describe decision‐making. Recently, however, efforts in psychology and behavioural ecology have resulted in the development of theories with higher descriptive validity. Furthermore, neuroeconomics is a new interdisciplinary field that combines contributions from economics, biology and psychology and aims to identify a biologically valid, mechanistic, mathematical and behavioural theory of choice and exchange. Recent neurophysiological advances have further deepened our understanding of the mechanistic implementation of a decision in the brain.

Key Concepts

Utility function
: A mathematical function that models the relationship between an objective measure of a commodity (such as money) and the subjective value or desirability of that commodity. The utility function is often assumed to be concave, which is supposed to underly risk aversion.

Risk attitude
: Animals and humans are almost never risk neutral, i.e. when choosing between a very risky and a less risky (or even certain) option, most organisms prefer the less risky option (
risk aversion
) even if the payoff of both options is identical, or even better for the risky option. Occasionally, some individuals systematically prefer the more risky option (
risk proneness
).

Expected utility theory
: Normatively flavoured model in economics that tries to prescribe how humans should make decisions under risk. It is assumed that decision‐makers compute the probability‐weighted sum of the utilities of all possible outcomes, integrate them with their current asset, and then choose the option the highest expected utility in final assets.

Discounted utility theory
: Similar model to expected utility, but for decisions in time. The weighting factor in discounted utility theory is not probability, but a function of the delay between choice and consumption.

Game theory
: Framework to formalize choice behaviour involving multiple interacting decision‐makers. A game allows to isolate and investigate in a controlled environment a limited set of premises of economic decision theory.

Prospect theory
: Alternative theory to expected utility theory with higher descriptive validity. It is assumed that outcomes of a decision are evaluated with respect to changes in wealth (gains versus losses), not in final states. Furthermore, the utility function is concave in the domain of gains, and convex in the domain of losses, and steeper for losses than for gains.

Choice heuristic
: A simple decision rule, or set of rules, that humans and animals apply to make decisions in complex environments.

Optimal foraging theory
: Based on the assumption that evolution should have favoured the development of decision mechanisms that maximize Darwinian fitness, optimal foraging theory aims to explore animal behaviour from an optimal choice perspective.

Neuroeconomics
: Interdisciplinary field that attempts to identify a biologically valid, mechanistic, mathematical and behavioural theory of choice and exchange.