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Posted at 10:52 AM ET, 03/13/2012

Is neuroscience the new ‘Freakonomics’?


Could neuroscience surpass economics when it comes to figuring out why and when we choose to buy? (Sean Gallup - GETTY IMAGES)

Many of the bestselling business books of the past decade, such as “Freakonomics” and “The Undercover Economist”, started with an implicit, fundamental premise: "If it can't be quantified or calculated, it can't be true."

These books often reduced baffling and complex scenarios -- everything from global warming to why there are so many Starbucks stores in your neighborhood — to simple explanations supported by basic economic thinking. Sometimes these explanations contained charts, graphs and little diagrams that made the world appear neat, tidy and orderly. A decade ago, in fact, Google made news when they hired UC Berkeley economics professor Hal Varian as their first in-house economist. Varian was charged with modeling consumer behaviors and consulting on corporate strategy. The announcement further projected the belief that, in short, economics was the key to market success.

Today, Google should be looking for a prize-winning neuroscientist.

The new generation of business thinking combines a more nuanced understanding that many actions can neither be quantified nor calculated. Often, these insights are culled from the cutting edge of neuroscience. This new "what you didn't know about your brain can help you"-genre most likely started with science writer Jonah Lehrer's wonderful ”Proust was a Neuroscientist.”. In the book, Lehrer explains how many of the underpinnings of modern neuroscience were actually discovered by the likes of Proust, Stravinsky and Escoffier.

A slew of other titles have followed, each of them offering unique insights into the workings of the human brain. Along the way, we've been told how the human brain decides what to buy, why traditional brainstorming approaches don't work as well as they should, how changing the default settings can change the final outcome and why companies need to understand and cultivate the habits of their customers.

We are, as a society, experiencing a profound reappraisal of traditional economics and its shortcomings. The world is suddenly a lot more irrational than we ever thought, full of black swans. In Economics 101, we're taught that economic models are able to predict the behavior of coldly rational decision-makers. Charts and graphs follow a simple mathematical beauty. When we lower interest rates, we expect a certain reaction. When we devise incentives for customers, we expect them to react in a certain way. When we provide customers with a menu of choices, we expect them to answer in a certain way.

The only problem, of course, is that humans are not always rational.

Not surprisingly, some of the most popular business titles of the past few years have combined research findings at the cutting edge of economic theory. Perhaps the best example is Daniel Kahneman's ”Thinking, Fast and Slow,” which is now edging up the bestseller lists. Kahneman is a Nobel Prize-winning economist who has helped to popularize the latest in economics thinking, including loss aversion. Interestingly enough, Kahneman refers to himself as a psychologist, rather than an economist.

This new thinking about the way the human brain works is starting to impact everything -- how supermarkets stock their shelves, when coupon offers are sent out to consumers, and how to devise the perfect title that will get you to click on a news article (wait, did you think that your reading this was an accident?). A retail store such as Target now knows that you're pregnant before your parents do, thanks to the wonders of understanding customer purchase habits. On the Web, understanding human behavior is everything, given that the best and brightest of our generation are now engaged in an elaborate game of getting people to click on a specific button, text link or banner ad.

A decade ago, if you asked top business leaders whether they'd ever consider reading a book on neuroscience, they probably would have looked askance at you while tapping away at their BlackBerry. Today, they realize that profits lie in understanding how the human brain works, how people make decisions, and what influences the final purchase. What they may not realize, however, is that this understanding is moreso in a neuroscientist’s wheelhouse than an economist’s.

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By  |  10:52 AM ET, 03/13/2012

Categories:  Dominic Basulto, Business, Morning Read, Research, Technology, Video

 
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