Economics for Managers Essay

Neuroeconomics is the study of economics which is based on the brain functions. It is an interdisciplinary field that seeks to explain how the brain interacts with the environment to produce economic or consumer behavior. In other words, when a person is processing a decision, some parts of brain will be active. Different types of decision will active different brain area, since the function of each area is different, the result of the decision processing will be different. It combines the research from neuroscience and behavioral economics. Neuroeconomics uses the data of brain processes to suggest new underpinnings for economic theories. Standard economics explain the economic behavior by measuring inputs, like prices, and predicting outputs, like how much people will buy, from a simplified theory of brain processes. However, brain processes much more complicated. That’s why we need Neuroeconomics which can explain the brain processes by brain scanning that shows which parts of the brain area active when people decided buy or not, which to buy and buy how many etc. under different conditions. This means that we will be able to replace the simple mathematical ideas from standard economics with more detailed descriptions based on neural knowledge.

Standard economics believes that human beings behave rationally. People make decisions after weighting the costs and benefits of actions in order to maximize their happiness (Camere, 2003). However, the standard economics cannot explain why people will change their decisions, why someone will do something without thinking about the consequences. Therefore, Neuroeconomics has been developed to explain these questions. Followings are two examples of Neuroeconomics.

Coca Cola vs. Pepsi Cola
Coke and Pepsi are the two biggest brands in cola market. Both of them have their own loyal customers. These people maintain strong behavioral preferences for one over the other. Why? Do they really taste differently? According to the Montague's Experimental Results (2004), the taste of Coke and Pepsi are very similar, subjects split equally in their preference for Coke and Pepsi in the double-blind taste tests. Most of them can hardly tell the differences without seeing the labels. But after they saw the labels, most of them had a strong preference on either Coke or Pepsi. This proved that brand information significantly influences people’s expressed preferences. In other words, the functional brain imaging results corroborate the behavioral taste test results.

Planned Buying vs. Impulse Buying
According to the classic economics theories, people spend money on their needs with the value that they are willing to pay. If the price is higher than what they expected to pay, they might change the suppliers or buy substitutes. This is what we called rational behavior. However, people in the impulse spending normally ignore their financial states and actual demands because impulses encourage action without careful consideration about the objective environment, and with little or no regard for potential realistic consequences. These emotional actions can be called irrational behaviors. Dennis (1987) provided an exploratory study of impulse buying episodes in The Journal of Consumer Research. The respondents are more likely to feel out-of-control when buying impulsively than when making contemplative purchases. Impulse buying is a fast experience. It is more likely to grab a product than choose one. A buying impulse tends to disrupt the consumer’s behavior stream. It is more likely to be a part of one’s regular routine. Impulse buying is more emotional than rational. Most people only realized after got home, the consequences are considered more as ‘bad’ than ‘good’. Most mental and emotional processing does not occur in the systematic way assumed by standard economics, but involves automatic, massively parallel systems to which can be only explained with the help of Neuroeconomics.

Brain

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