Neuroeconomics and the Firm
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Neuroeconomics and the Firm

Edited by Angela A. Stanton, Mellani Day and Isabell M. Welpe

The ideal firm has been studied over several centuries, yet little is known about what makes one successful and another fail. This pioneering book brings together leading researchers investigating the concept of the firm from a neuroscientific perspective.
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Chapter 9: Dopamine, Expected Utility and Decision-making in the Firm

Donald T. Wargo, Norman A. Baglini and Katherine A. Nelson

Extract

9. Dopamine, expected utility and decision-making in the firm Donald T. Wargo, Norman A. Baglini and Katherine A. Nelson INTRODUCTION The lessons to be learned from understanding the mechanisms underlying expected utility (the economic model of decision-making) and the dopamine-mediated reward system (the neurological correlate of decisionmaking) are quite profound for understanding decision-making in the firm. The current research from neuroeconomics, psychology and neuroscience has shown that there are three interconnected but nevertheless distinct decision-making systems in the human brain: (1) an unconscious, intuitive and emotional system mediated mainly by midbrain regions such as the ventral striatum, the insula and the amygdala; (2) a conscious, rational system or ‘executive function’, mediated principally in the orbitofrontal cortex; (3) a system of habitual behavior that is either preprogrammed genetically or developed into habits over time. Dopamine is the principal neurotransmitter that is involved in these three systems, so analyzing its role in individual decision-making in the firm is critical. As a prime example of a system gone haywire, we can see a disastrous case study of conflicts among these three systems by looking at the causes of the 2008 global credit crisis. As an example with serious consequences, the major investment banks saw little risk in the massive leverage they exposed their companies, their stockholders and their clients to during the years from 2004 to 2007. Further, the US Securities Exchange Commission, even while worried about the risks, removed the borrowing limits of the largest Wall Street investment banks. These investment banks...

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