Neuroeconomics Overview: Understanding “The Mind of the Market”

The ways we think about money and make financial decisions are typically far from rational.   We get upset when we find out that another person is getting a better deal, despite the fact that we were perfectly happy a minute ago.  We spend more for well-known brands that have no difference in real quality.  We invest in punishing others for perceived “violations in justice” despite the fact that there are only negative consequences for ourselves.  We spend a lot of money on things we want that, in the end, don’t make any difference in our level of happiness.

Despite the considerable evidence that we think and act irrationally with money, most of this irrationality makes much more sense when you look at our behavior from the perspective of our long history as small bands of hunter-gatherers operating in an environment of limited resources and high risk.   We just haven’t fully adapted to the relatively recent development of our consumer-trader society.

If you’re looking for a good introduction to behavioral and evolutionary economics leading up to the emerging field of neuroeconomics, check out Michael Shermer‘s The Mind of the Market.  The Mind of the Market is an easy to read summary of some of the work of many of the brilliant contributors to this field including:  Daniel Kahneman and Amos Tversky’s groundbreaking work in behavioral economicsLeon Festinger’s study of cognitive dissonanceJohn Nash on the Nash EquilibriumRead Montague’s work on decision making,  Daniel Gilbert’s study of happiness and the problem of affective forecasting, and more…

For a short teaser, read Shermer’s recent essay:  Why People Believe Weird Things About Money

Most business leaders make the assumption that their customers are rational decision makers.  As a result, they make investments in developing products and services that have rational benefits.  Much of our work with clients involves helping them understand how to influence more powerful customers experiences by designing what they do from the seemingly irrational “mental model of the customer.”   If you’re interested in more perspective on this, check out the following Customer Innovations blog posts:

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