Economist Robert Shiller, Ph.D., believes the combination of neuroscience and economics—neruoeconomics—may one day be able to predict economic crises. He’s just not sure how.
Forecasting the economy is extremely difficult because it is incredibly complex and has so many variables (case in point: no economic models predicted the recent U.S. housing crash). That was the point driven home most often at Shiller’s lecture, “Animal Spirits: How Human Behavior Drives the Economy,” Saturday at the Society for Neuroscience annual meeting. [SfN has posted a video of the talk; Shiller starts about 19 min in.]
Unlike in other fields of science, the disadvantage of studying the economy is that the researchers can’t perform experiments. Economists can’t just say, “Let’s see what happens if we lower taxes for the middle class.”
Antonio Rangel, who participated in a post-lecture discussion, asked, “Can we use our increased knowledge of how the brain makes decisions to better predict the economy?” Shiller’s answer is that we have to better understand individual decision-making.
Neuroeconomics may have just as good a chance at predicting the ups and downs of the economy as any other model, because accurate forecasting is just so difficult. “As hard as understanding the brain is,” said Rangel, “understanding the economy is at least two orders of magnitude harder.”
On one hand, listening to this lecture made me feel better about my own difficulties understanding the economy (I bug the more financially-savvy members of my family before investing). On the other, it wasn’t reassuring to learn that even the experts have little confidence when it comes to forecasting.
Below is a video Shiller played before he spoke. It depicts the history of inflation-adjusted home prices in the United States in the form of a roller coaster. Very cool.