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 World’s Largest Study on Allergic Rhinitis Reveals new Risk Genes
17.07.2018 | Helmholtz Zentrum München - Deutsches Forschungszentrum für Gesundheit und Umwelt

nachricht Plant mothers talk to their embryos via the hormone auxin
17.07.2018 | Institute of Science and Technology Austria

All articles from Life Sciences >>>

The most recent press releases about innovation >>>

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

Im Focus: First evidence on the source of extragalactic particles

For the first time ever, scientists have determined the cosmic origin of highest-energy neutrinos. A research group led by IceCube scientist Elisa Resconi, spokesperson of the Collaborative Research Center SFB1258 at the Technical University of Munich (TUM), provides an important piece of evidence that the particles detected by the IceCube neutrino telescope at the South Pole originate from a galaxy four billion light-years away from Earth.

To rule out other origins with certainty, the team led by neutrino physicist Elisa Resconi from the Technical University of Munich and multi-wavelength...

Im Focus: Magnetic vortices: Two independent magnetic skyrmion phases discovered in a single material

For the first time a team of researchers have discovered two different phases of magnetic skyrmions in a single material. Physicists of the Technical Universities of Munich and Dresden and the University of Cologne can now better study and understand the properties of these magnetic structures, which are important for both basic research and applications.

Whirlpools are an everyday experience in a bath tub: When the water is drained a circular vortex is formed. Typically, such whirls are rather stable. Similar...

Im Focus: Breaking the bond: To take part or not?

Physicists working with Roland Wester at the University of Innsbruck have investigated if and how chemical reactions can be influenced by targeted vibrational excitation of the reactants. They were able to demonstrate that excitation with a laser beam does not affect the efficiency of a chemical exchange reaction and that the excited molecular group acts only as a spectator in the reaction.

A frequently used reaction in organic chemistry is nucleophilic substitution. It plays, for example, an important role in in the synthesis of new chemical...

Im Focus: New 2D Spectroscopy Methods

Optical spectroscopy allows investigating the energy structure and dynamic properties of complex quantum systems. Researchers from the University of Würzburg present two new approaches of coherent two-dimensional spectroscopy.

"Put an excitation into the system and observe how it evolves." According to physicist Professor Tobias Brixner, this is the credo of optical spectroscopy....

Im Focus: Chemical reactions in the light of ultrashort X-ray pulses from free-electron lasers

Ultra-short, high-intensity X-ray flashes open the door to the foundations of chemical reactions. Free-electron lasers generate these kinds of pulses, but there is a catch: the pulses vary in duration and energy. An international research team has now presented a solution: Using a ring of 16 detectors and a circularly polarized laser beam, they can determine both factors with attosecond accuracy.

Free-electron lasers (FELs) generate extremely short and intense X-ray flashes. Researchers can use these flashes to resolve structures with diameters on the...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Leading experts in Diabetes, Metabolism and Biomedical Engineering discuss Precision Medicine

13.07.2018 | Event News

Conference on Laser Polishing – LaP: Fine Tuning for Surfaces

12.07.2018 | Event News

11th European Wood-based Panel Symposium 2018: Meeting point for the wood-based materials industry

03.07.2018 | Event News

 
Latest News

Microscopic trampoline may help create networks of quantum computers

17.07.2018 | Information Technology

In borophene, boundaries are no barrier

17.07.2018 | Materials Sciences

The role of Sodium for the Enhancement of Solar Cells

17.07.2018 | Power and Electrical Engineering

VideoLinks
Science & Research
Overview of more VideoLinks >>>