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The Economics of Brains (08 Apr 2005)
The problem, of course, is that people don’t always behave rationally. They make decisions based on fear, greed, and envy. They buy plasma TVs and luxury vehicles they can’t afford. They don’t save enough for retirement. They indulge in risky behavior such as gambling. Economists understand this as well as anyone, but in order to keep their mathematical models tractable, they make simplifying assumptions. Then they try to adjust their equations by adding terms that account for “irrational” behavior. But if economists could develop models that accounted for the subtleties of the human brain, they might be able to predict complex behaviors more accurately. This, in turn, might have any number of practical applications: investment bankers could hedge against financial euphoria like the Internet boom; advertisers could sell products more winningly.
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