How do human beings behave in response to risk? That is one of the most fundamental unanswered questions of our time.
A general theory of decision-making amid uncertainty would be the kind of scientific advance that comes only a few times a century. Risk is central to financial and insurance markets. It affects the consumption, saving and business investment that moves the global economy. Understanding human behavior in the face of risk would let us reduce accidents, retire more comfortably, get cheaper health insurance and maybe even avoid recessions.
A number of our smartest scientists have tried to develop a general theory of risk behavior. John von Neumann, the pioneering mathematician and physicist, took a crack at it back in 1944, when he developed the theory of expected utility along with Oskar Morgenstern.
According to this simple theory, people value a possible outcome by multiplying the probability that something happens by the amount they would like it to happen. This beautiful idea underlies much of modern economic theory, but unfortunately it doesn't work well in most situations.
Alternative theories have been developed for specific applications. The psychologist Daniel Kahneman won a Nobel Prize for the creation of prospect theory, which says — among other things — that people measure outcomes relative to a reference point. That theory does a great job of explaining the behavior of subjects in certain lab experiments, and can help account for the actions of certain inexperienced consumers. But it is very difficult to apply generally, because the reference points are hard to predict in advance and may shift in unpredictable ways.
Another alternative, developed by various economists, modifies expected utility in certain ways that make it a bit better — though still not great — at explaining broad financial market movements. But because the theory relies on people's expectations of things far in the future, it is very difficult to test in a laboratory or field experiment.
Not only do we not know how people make choices about things like investments, but we don't even know how they form their beliefs about the future. People don't seem to follow the kind of mathematically correct reasoning that most psychologists and economists think of as rational. Instead, they use a host of shortcuts and heuristics, and fall prey to various biases. It's very hard for psychologists to predict which of these will be important in any given situation.
So economists and psychologists have so far failed to find a general theory describing how people respond to an uncertain world. Maybe it's time for neuroscientists to try their hand at it.
What can neuroscience do to help us understand risk? However humans actually make decisions, it must happen via some mechanisms in the brain. If we can identify those mechanisms, we can watch them in action while people make decisions. That could shed light on all kinds of questions.
For example, neuroscientist Kelly Zalocusky of Stanford University has found a group of neurons that light up whenever a rat is about to choose a safe option over a risky one. If we can find a similar structure in the human brain, then by watching those neurons, we can know — more or less — when a person is trying to avoid risk.
