The Brain as a Hierarchical Organization

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The Brain as a Hierarchical Organization
Isabelle BrocasUSC and CEPR
Juan D. CarrilloUSC and CEPR

• March 2006

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What is Neuroeconomic Theory?
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Some topics of interests for neuroscientists

• Information processing
• Resource allocation
• Competition and control
• Monitoring
• Self-management
• Discounting
• Preferential access to information, etc.
• Remarkably similar to the topics of research on
  the
• theory of the firm

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Objective of this research

• Understand behaviors difficult to reconcile with
  traditional
• theories (just as recent behavioral economics
  literature)
• Guilt
• Self-imposed rules
• Mistaken consumption, etc.

• Provide micro-microfoundations for
  characteristics
• traditionally considered exogenous
• Discounting
• Risk-aversion, etc.
• Open the black-box of decision-making just as
  the modern theory of the firm opened the
  black-box of the firm
• Revisit the individual decision-making paradigm
• (not decision-theory but game-theory approach)

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This paper

• Incorporate in a model of the brain two findings
  that have
• received support in neuro-experiments
• Conflict in the brain between
• Forward-looking system (cortical system)capable
  of intertemporal tradeoffs
• Myopic system (limbic system)interested only in
  immediate gratification
• McClure et al. (2004)
• Restricted cognitive access within brain to
  information
• Berns et al. (1997), Whalen et al. (1998)
• The heart has its reasons which reason knows
  nothing of
• (Blaise Pascal)

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Which disciplines accept within-period
conflicts and asymmetries of the self?

• Clinical Psychology
• Social Psychology
• Philosophy
• Neuroscience
• Cellular Biology
• I would say all but Economics

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An important caveat

• Assumptions based on neuroscience evidence
• Conflict between myopic and forward-looking
• Asymmetric information
• Hierarchical order and control
• Modeling choices for which there is no evidence
  for or against (yet!)
• Vertical hierarchy between
• Forward-looking planner
• Myopic doer
• Private information possessed by myopic

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Related literature

• Hyperbolic discounting with incomplete
  information(Carrillo-Mariotti, Brocas-Carrillo,
  Benabou-Tirole, Amador-Werning-Angeletos)
• Main Differences
• Conflict within (rather than between) periods
• Asym. info within (rather than between) periods

• Other dual-self theories (Thaler-Shefrin,
  Fudenberg-Levine, Loewenstein-ODonoghue,
  Benhabib-Bisin, Bernheim-Rangel) Main
  Differences
• Asym. Info (rather than full info.) within
  periods
• Constraints (rather than costs) in
  decision-making
• (Two linked activities)

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The model

• 2 periods of consumption and labor
  and
• Utility

where u gt 0, u lt 0 and ?t is valuation at date
t
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• Consumption is non-negative
• Labor is non-negative and bounded
• 1 unit of labor ? 1 unit of income ? 1 unit of
  consumption
• Perfect capital markets with interest rate r gt
  0? Intertemporal budget constraint
• Note no individual rationality constraint

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Benchmark conflict under full information
P knows the valuation ?t of At , so P
solves
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• Consumption at t increases with ?t (valuation
  at t )
• Labor at 1 is maximum (positive interest rate on
  savings)
• Labor at 2 is adjusted to meet budget constraint
• Positive relation consumption at 12 and labor
  at 12work more in your lifetime to consume
  more in your lifetime(due to intertemporal
  budget constraint)
• No relation between consumption at 1 and labor at
  1

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Conflict under asymmetric information

• At knows his valuation ?t
• P only knows that ?t i.i.d. F(?t)
• ? P cannot impose restrictions that depend on
  valuation ?t
• Note
• Because constraint (no access to ?t ) rather than
  exogenous
• cost of imposing choices (e.g. c(?t - ?t) when
  ?t ? ?t )
• No presupposed tradeoff
• No preconceived idea of which restriction P will
  impose

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Optimal rule at date 2 P vs. A2

• Trivial. No restrictions (except budget balance)
  because at
• date 2 no conflict between P and A2

? A2 chooses
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Optimal rule at date 1 P vs. A1
Principal P
date 1
t
Agent 1 A1
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• P offers the following menu of consumption and
  labor pairs
• A1 picks the pair he prefers
• Note that the pairs are designed such that
• Different valuations ? different choices
• Higher valuation ? more consumption and more
  labor
• the result is reminiscent of the mechanism
  design literature

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• Some conclusions
• Endogenous emergence of (second-best)
  self-imposed rulework more today if you want
  to consume more today.
• Behavior has a feeling of guilt without
  assuming it.
• Current reward (leisure) tracks current earning
  (one-day-at-a-time, narrow bracketing effect).
• No consumption smoothing, with testable
  implications.Distribution of consumption over
  life cycle depends on
• Source of income (endowment vs. current labor)
• Period-to-period access to labor

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Time-preference rates

• Consumption shifts to first period
• Labor shifts to second period
• Increase in consumption greater for high
  valuations
• Decrease in labor greater for low valuations

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• But there are also differences distribution
  F(?t) from which valuations are drawn affects
  consumption.

• Some conclusions
• Micro-microfoundations for intertemporal
  discounting.
• Testable (?) differences given current
  valuation, consumption is smaller if individual
  usually likes the good a lot.

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Incentive salience and visceral factors

• Neuroscience incentive salience Berridge,
  2003
• One system mediates motivation to seek pleasure
  (wanting)
• A different system mediates the feeling of
  pleasure (liking)
• Stimulus of 1st system ? more work for same
  reward
• Social Psychology visceral factors
  Loewenstein, 1996Emotions (fear, anger) and
  drives (hunger) ? discrepancy optimal vs.
  realized (out-of-control) behavior

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Optimal rule at date 1 P vs. A1 very similar to
previous case

• P offers a menu of consumption and labor pairs
• Higher ?1 ? higher c1 and higher n1

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Optimal rule at date 2 P vs. A2
sunk
Principal P
date 2
t
Agent 2 A2

• P imposes only two constraints
• Consumption cap
• Budget balance
• A2 chooses
• If ?2 lt ? unconstrained optimal pair given his
  bias
• If ?2 gt ? same pair as an agent with valuation
  ?

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• Some conclusions
• Optimality requires a simple, non-intrusive
  rule-of-thumbdo what you want as long as you
  dont abuse
• Stronger bias ? tighter control
• Note 1 not aware of similar result in any
  mechanism design
• problem in which P can use two tools
  
• Note 2 nice reinterpretation as parent /
  offspring relation

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• Intuition. Three ways to satisfy incentive
  compatibility
• Freedom choose whatever pair you prefer
• Pooling everyone is offered the same pair
• Self-selection specific monotonic relation
  between c and n
• Standard mechanism design 3 (or 3 and 2 if only
  3 not feasible)
• Our problem
• 1 is costly only for strong conflict
• 2 is inefficient
• 3 implies wasted resources (excessive work,
  bad also for P)
• Optimality ? 1 for low conflict and 2 for high
  conflict

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Whats next?

• Test of behavioral implications
• Period-to-period labor opportunities affect
  consumption
• How much the good is usually liked affects
  consumption
• More realistic and comprehensive models of the
  brain.

• For this, we need many more neuroeconomic
  experiments to guide theoretical models (and
  viceversa)
• Is the hierarchy of the myopic vs. forward
  looking vertical?
• Is the superior information possessed by the
  myopic system?
• Are systems with restricted access to knowledge
  aware of their informational deficit?
• Does the forward looking system discount the
  future?
• When are salient incentives more likely to
  operate?