Section 3

Social Neuroeconomics

Ernst Fehr

"The emerging neuroeconomic approach rejects the premise of unobservability, and seeks a microfoundation of social and economic activity in neural circuitry,, using functional magnetic resonance imaging (fMRI), transcranial magnetic stimulation (TMS), pharmacological interventions and other techniques."

While the traditional economic approach generally assumes that people act in a self-interested manner, Ernst Fehr has uncovered a large amount of experimental evidence that would indicate many people act according to social preference. This means that their choices are based on positive or negative concern for the welfare of others and on what other players believe about them. Fehr's work focuses on an "economics of reciprocity" in which individuals will contribute to common goals that aren't necessarily beneficial to themselves when others are contributing. The foundation of social neuroeconomics is based on the fact that there are competing motives in making decisions rather than just self-interest. These competing motives not only include reciprocity, but altruism and inequity aversion as well.

Theories of Social Preference

Example: Players are assumed to value kind intentions positively and hostile intentions negatively. If player A intentionally reduced player B's payoff for their own benefit, a reciprocal player B would punish A. If it was bad luck that led to a redistribution of income from B to A, player B would not punish A. In contrast, if a player is motivated by inequity aversion, then bad luck would cause player B to redistribute income equally. Other theories