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Behavioral Economics - From neuron to market price

Updated: Nov 26, 2023

Behavioral Economics - From neuron to market price

This infographic demonstrates how individual pricing information is initiated deep in each of our brains. Through a transformation process, that information is filtered through our behavioral psychology via cognitive biases, anchoring, framing, and other situational and time-based interactions. Our behavioral psychology impacts our economic choices and is finally coalesced into prices. Think of that price - or money, in general - as a dynamic signaling mechanism that aggregates information describing our utility or preference bundle.

Adam Smith defined the invisible hand as the mechanism by which all our preference bundles, via the market process, dynamically interact to settle on a single market price equilibrium. He also defined the "Impartial Spectator" as an imagined aggregation of all those that you respect and want to do well by. The impartial spectator is like your 'conscience person' by which you compared and evaluate all your actions. While Smith does not explicitly relate the impartial spectator to God or some deity, you may interpret the impartial spectator as such. Smith wisely leaves it up to the reader to define their own impartial spectator to help guide decisions under uncertainty.

It is beyond impressive that Adam Smith got this right -- Even though Neurobiology and Behavioral Psychology were non-existent, at least how they are today, in the 1700s.

This infographic is found in the article:

Please check out our Adam Smith articles exploring this infographic and other related topics:

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