The Brain as a Hierarchical Organization

Economics has experienced an inflow of fresh ideas following the addition of elements from psychology into economic models. A recent literature incorporates intrapersonal tensions into these models. The present paper provides a step in this direction. Our basic premise is the existence of three types of brain-based conflicts: first, a conflict between the information available in different areas of the brain, which we refer to as an asymmetric information conflict; second, a conflict between the importance attached to temporally close versus temporally distant events, which we refer to as a temporal horizon conflict; and third, a conflict between the relative weight in utility attached to tempting versus nontempting goods, which we refer to as an incentive salience conflict. Starting from these three assumptions about the architecture of the brain, we construct an orthodox multiperiod, multiaction model. The model is solved with tools adapted from mechanism design and is used to provide foundations for discounting and an explanation for several behavioral anomalies. Asymmetric information and temporal conflicts is the focus of Section II. We consider an individual who undertakes two activities during several periods, one pleasant (consumption) and one unpleasant (labor). Activities are linked through an intertemporal budget constraint. To model the temporal and informational conflicts, we divide the individual into an impulsive/myopic system (the agent, he) and a cognitive/forward-looking system (the principal, she). We then assume that the marginal value of consumption varies from period to period and is known only by the agent. Despite the fact that the cognitive system has control over the impulsive system, she cannot impose her first-best choices due to the informational conflict. Instead, she proposes a menu — The Brain as a Hierarchical Organization