Neuroeconomics in NYTimes

The Freakonomics blog at the New York Times this week has a post by Andrew Lo on how neuroscience is shedding light on the current financial crisis. This is always going to be a contentious claim, so I think perhaps a better way to say this is: neuroscience is providing additional evidence that factors outside of the standard theory, like fear and ambiguity aversion, influence behavior. Many will say that this is a "straw man" and that of course everyone knows fear matters. I get that kind of argument quite a bit during seminars. But I don't see how this is a straw man and it is "obvious" only in hindsight. Here is a quote from Colin Camerer in Economics and Philosophy that I particularly like on the topic:

A typical dictionary definition of a “straw man” is this: “To argue against a straw man is to interpret someone’s position in an unfairly weak way, and so argue against a position that nobody holds, or is likely to hold.”... A good example is self-interested preferences. This preference specification is clearly not a straw man because that simple form of preference is actually used in many types of analysis... Furthermore, belief in self-interest is not a position nobody holds because it is often clearly espoused...

Also, if one thinks it is an obvious point that fear influences risk attitude, then it should be useful to measure, say, the effects of fear on stock prices. But how does one measure the independent variable--fear? You could go around surveying traders, but you're stuck with self-report and low temporal resolution data in the best of times. Or you could measure things like galvanic skin response in real-time like Lo and Repin did, which at least gets you some indication of physiological and emotional arousal. Is this ideal? Of course not, but short of sticking electrodes in brains of traders like we do in monkey neurophysiology studies, these are the best measures we have.