Understanding the Hows and Whys of Decision-Making: From Expected Utility to Divisive Normalization

Over the course of the last century, economists and ethologists have built detailed models from first principles of how humans and animals should make decisions. Over the course of the last few decades, psychologists and behavioral economists have gathered a wealth of data at variance with the predictions of these economic models. This has led to the development of highly descriptive models that can often predict what choices people or animals will make but without offering any insight into why people make the choices that they do--especially when those choices reduce a decision-maker's well-being. Over the course of the last two decades, neurobiologists working with economists and psychologists have begun to use our growing understanding of how the nervous system works to develop new models of how the nervous system makes decisions. The result, a growing revolution at the interdisciplinary border of neuroscience, psychology, and economics, is a new field called Neuroeconomics. Emerging neuroeconomic models stand to revolutionize our understanding of human and animal choice behavior by combining fundamental properties of neurobiological representation with decision-theoretic analyses. In this overview, one class of these models, based on the widely observed neural computation known as divisive normalization, is presented in detail. The work demonstrates not only that a discrete class of computation widely observed in the nervous system is fundamentally ubiquitous, but how that computation shapes behaviors ranging from visual perception to financial decision-making. It also offers the hope of reconciling economic analysis of what choices we should make with psychological observations of the choices we actually do make.