Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Where bonehead investments come from

01.09.2005


The ups and downs of the stock market reflect investors’ balance between greed and fear, goes an old saying. Until now, though, economists have not had a way to incorporate such emotions into their models of investors’ strategies. However, in the September 1, 2005, issue of Neuron, Camelia M. Kuhnen and Brian Knutson of Stanford University report the identification of two key brain regions activated before people make risk-seeking versus risk-aversion investment mistakes.
They said that their findings may help to "ultimately improve the design of economic institutions so as to facilitate optimal investor behavior." They also said they believe their experimental design--which they call the "Behavioral Investment Allocation Strategy"--enables researchers to bring the real-life equivalent of individual investment behavior into the laboratory.

In their experiments, the researchers asked volunteers to make investment decisions among two stocks and a bond by pressing buttons. Before each trial run, the researchers "showed them the money," telling the subjects that they would receive a percentage of the cash that they made by investing or would lose cash from their participation fee if they were not successful. Without telling the subjects, the researchers randomly designated one of the stocks a "bad" stock more likely to lose money or as a "good" stock that was more likely to make money. The bond was a safe but conservative investment.


The researchers then scanned the subjects’ brains using functional magnetic resonance imaging (fMRI) as they proceeded through a series of decisions on investing in the pairs of the stocks or with the bond and learned the outcomes of those decisions. The commonly used technique of fMRI utilizes harmless magnetic fields and radio signals to map detailed blood flow in brain regions, which reflects activity.

The researchers’ analyses of the subjects’ choices and brain activity revealed that an area called the nucleus accumbens (NAcc) tended to distinctively activate before the researchers made investing mistakes that were "risk seeking." That is, they decided to invest in a stock whose history had shown it to be "bad."

Conversely, found the researchers, the brain area called the anterior insula activated before the subjects made "risk-averse" mistakes--for example, investing in the bond when they had an opportunity to invest in a "good" stock.

The researchers wrote that their results "indicate that, above and beyond contributing to rational choice, anticipatory neural activation may also promote irrational choice. Thus, financial decision making may require a delicate balance--recruitment of distinct circuits may be necessary for taking or avoiding risks, but excessive activation of one mechanism or the other may lead to mistakes."

Kuhnen and Knutson concluded that "Overall, these findings suggest that risk-seeking choices (such as gambling at a casino) and risk-averse choices (such as buying insurance) may be driven by two distinct neural circuits involving the NAcc and the anterior insula. The findings are consistent with the notion that activation in the NAcc and anterior insula, respectively, index positive and negative anticipatory affective states and that activating one of these two regions can lead to a shift in risk preferences. This may explain why casinos surround their guests with reward cues (e.g., inexpensive food, free liquor, surprise gifts, potential jackpot prizes)--anticipation of rewards activates the NAcc, which may lead to an increase in the likelihood of individuals switching from risk-averse to risk-seeking behavior. A similar story in reverse may apply to the marketing strategies employed by insurance companies," they wrote.

Heidi Hardman | EurekAlert!
Further information:
http://www.cell.com

More articles from Life Sciences:

nachricht The birth of a new protein
20.10.2017 | University of Arizona

nachricht Building New Moss Factories
20.10.2017 | Albert-Ludwigs-Universität Freiburg im Breisgau

All articles from Life Sciences >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Neutron star merger directly observed for the first time

University of Maryland researchers contribute to historic detection of gravitational waves and light created by event

On August 17, 2017, at 12:41:04 UTC, scientists made the first direct observation of a merger between two neutron stars--the dense, collapsed cores that remain...

Im Focus: Breaking: the first light from two neutron stars merging

Seven new papers describe the first-ever detection of light from a gravitational wave source. The event, caused by two neutron stars colliding and merging together, was dubbed GW170817 because it sent ripples through space-time that reached Earth on 2017 August 17. Around the world, hundreds of excited astronomers mobilized quickly and were able to observe the event using numerous telescopes, providing a wealth of new data.

Previous detections of gravitational waves have all involved the merger of two black holes, a feat that won the 2017 Nobel Prize in Physics earlier this month....

Im Focus: Smart sensors for efficient processes

Material defects in end products can quickly result in failures in many areas of industry, and have a massive impact on the safe use of their products. This is why, in the field of quality assurance, intelligent, nondestructive sensor systems play a key role. They allow testing components and parts in a rapid and cost-efficient manner without destroying the actual product or changing its surface. Experts from the Fraunhofer IZFP in Saarbrücken will be presenting two exhibits at the Blechexpo in Stuttgart from 7–10 November 2017 that allow fast, reliable, and automated characterization of materials and detection of defects (Hall 5, Booth 5306).

When quality testing uses time-consuming destructive test methods, it can result in enormous costs due to damaging or destroying the products. And given that...

Im Focus: Cold molecules on collision course

Using a new cooling technique MPQ scientists succeed at observing collisions in a dense beam of cold and slow dipolar molecules.

How do chemical reactions proceed at extremely low temperatures? The answer requires the investigation of molecular samples that are cold, dense, and slow at...

Im Focus: Shrinking the proton again!

Scientists from the Max Planck Institute of Quantum Optics, using high precision laser spectroscopy of atomic hydrogen, confirm the surprisingly small value of the proton radius determined from muonic hydrogen.

It was one of the breakthroughs of the year 2010: Laser spectroscopy of muonic hydrogen resulted in a value for the proton charge radius that was significantly...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ASEAN Member States discuss the future role of renewable energy

17.10.2017 | Event News

World Health Summit 2017: International experts set the course for the future of Global Health

10.10.2017 | Event News

Climate Engineering Conference 2017 Opens in Berlin

10.10.2017 | Event News

 
Latest News

NRL clarifies valley polarization for electronic and optoelectronic technologies

20.10.2017 | Interdisciplinary Research

Metallic nanoparticles will help to determine the percentage of volatile compounds

20.10.2017 | Materials Sciences

Shallow soils promote savannas in South America

20.10.2017 | Earth Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>