Based on recent neuroscience evidence, we model the brain as a dual-system organization subject to three conflicts: asymmetric information, temporal horizon, and incentive salience. Under the first and second conflicts, we show that the uninformed system imposes a positive link between consumption and labor at every period. Furthermore, decreasing impatience endogenously emerges as a consequence of these two conflicts. Under the first and third conflicts, it becomes optimal to set a consumption cap. Finally, we discuss the behavioral implications of these rules for choice bracketing and expense tracking, and for consumption over the life cycle. (JEL D11, D74, D82, D87, D91)

Economics has traditionally relied on revealed preferences (and, occasionally, on verbal reports) to understand the desires of people. Another source of information has been developed in recent years: the direct observation of choice processes. This mechanism, possible thanks to the improvements in the designs and techniques to measure brain activity, is explored in the bur geoning field of experimental neuroeconom ics (see Paul W. Glimcher and Aldo Rustichini (2004) and Colin Camerer, George Loewenstein, and Drazen Prelec (2005) for recent surveys). In this article, we argue that the evidence on brain activity can also be used to build theo retical models that help us understand choices and predict behaviors. We label this research “Neuroeconomic Theory.” In Section I, we describe the procedure, discuss some advan tages over traditional methodologies, and estab lish some facts that motivate our approach. In Section II, we illustrate the methodology with two brain-based models of decision making. I. What is “Neuroeconomic Theory”? Neuroeconomic theory is an interdisciplin ary line of investigation that combines research from neuroscience, neurobiology, and econom ics. Experimental neuroscience and neurobiology provide detailed evidence of the functionality, interconnectivity, and physiological constraints of the brain systems involved in decision making. Microeconomic theory supplies the toolkit to build simple optimization models that incorporate these network interactions and well-defined con straints into the mechanisms of choice.