Why Dr Singh needs some monkeys

Everyone knows why Indian reforms have not gone faster: politicians think reforms enhance risk to them and they therefore prefer to go slowly. It is, in a way, the way old men drive their cars.

Economists call this risk aversion and, in recent years, they have been studying it by using experimental psychology instead of the usual maths or time series data. The result is the new field of neuroeconomics.

Neuroeconomics uses the latest brain imaging technology to look at the brain to find out how people decide. The technique has been developed by Elizabeth Phelps, a professor of psychology and neural science at NYU and Colin Camerer, an economist at Caltech.

A fascinating article in the New Yorker - sent to me by Gopi Arora, the former finance secretary - describes what is going on in neuroeconomics.

The author is John Cassidy who has taken part in some of the experiments. He quotes a neuroscientist at Princeton called Jonathan Cohen, who has collaborated a lot with economists.

According to Cohen, "The key idea in neuroeconomics is that there are multiple systems in the brain. Most of the time these systems co-operate in decision making; but under some circumstances they compete with one another."

The basic experiments have been carried out by presenting people with alternatives that carry different degrees of risk. It turns out that given "an even chance of winning a hundred and fifty dollars or losing a hundred dollars, most refuse the gamble, even at the expense of gains."

Hence the question: why do people avoid risk even when a little bit can help them make enormous gains? Or, why does Sonia Gandhi not allow reforms to take off even though the Left threat to the government has almost disappeared?

Cassidy says that "as imaging technology gets more sophisticated and easier to use, it may become possible to monitor investors' brains while they trade stocks at their offices." But for the moment it seems economists are perfecting the likely techniques via laboratory experiments.

These consist of confronting the subject with a set of known risks in one case and less well-known ones in the other. "With less information to go on, the players exhibited substantially more activity in the amygdala and in the orbitofrontal cortex, which is believed to modulate activity in the amygdala."

In simpler language, this means that when the brain can't figure out what is happening, the amygdala transmits fear to the orbitofrontal cortex and their emotions can overpower their reasoning, leading them to reject risky propositions.

But now comes the bad news for risk takers and therefore reformers. It seems the amygdala and orbitofrontal factor led researchers to ask whether people, who feel lesser amount of fear, make better investors. So they looked at people with brain damage. It turned out that on 50-50 gambles, where they would either win a dollar-fifty or lose a dollar, ordinary people with no brain lesions rejected the bet.

But "the patients with lesions accepted the bets more than eighty per cent of the time, and they ended up making significantly more money than a control group made up of people who had no brain damage."

But, as you might expect from the stick-in-mud traditional economists, they are unimpressed. Two Princeton economists, says Cassidy, recently wrote that "Neuroscience evidence cannot refute economic models because the latter make no assumptions and draw no conclusions about the physiology of the brain." So?

Others too have poured different amounts of scorn on neuroeconomics. But it looks like a lost battle.

However, says Cassidy, "the biggest challenge facing neuroeconomics comes not from its opponents in the economics profession but from its supposed allies in neuroscience. Many neuroscientists now consider MRI data to be uninformative."

So one objection is that "there is no evidence that hidden inside the brain are two fully independent systems, one rational and one irrational."

Partly to prove this, some neuroscientists trained monkeys to evaluate payoffs between two alternatives. Before you knew what was what, they were maximising them.

The researchers tracked the "neural firing in part of the posterior parietal cortex…and discovered that the firing rate was closely related to the rewards the monkeys were likely to receive." Clearly, monkeys find out soon enough what is good for them but not politicians.