March 3, 2010
I’m back….
H/T Anibal
Click Here To ReadThe Neuroscience of Money: Finding How Traders Tick
Introduction (via USB)
However complex decisions about risk might be, it takes little to impact the outcome: Just show people pictures of erotic scenes or rotten food.
In a forthcoming study by Northwestern University assistant finance professor Camelia Kuhnen and a Stanford University colleague, associate psychology and neuroscience professor Brian Knutson, 28 research recruits were asked to make 90 decisions on asset allocation that ranged from safe to volatile – but not before they were flashed pictures to first stoke an emotional reaction.
It turns out people are more reluctant to make a risky investment after seeing an image of moldy peaches and more likely to go for risk after being aroused.
What this shows, say researchers, is that decisions about financial risk can be affected by emotional response. This research builds on the team’s earlier findings and other studies showing some of the brain links that generate emotional states also process information about risk, and the results could go a long way toward helping behaviorists determine whether there’s a genetic basis for risk appetite – and how that might translate to conscious action by financial advisors, traders or chief risk officers.
Click Here To ReadThe Neuroscience of Money: Finding How Traders Tick
October 21, 2009
This paper discusses the neural circuitry involved in altruistic, fair and trusting behaviors. Enjoy!
Social Neuroeconomics: The Neural Circuitry Of Social Preferences
Abstract (Via Kellogg)
Combining the methods of neuroscience and economics generates powerful tools for studying the brain processes behind human social interaction. We argue that hedonic interpretations of theories of social preferences provide a useful framework that generates interesting predictions and helps interpret brain activations involved in altruistic, fair and trusting behaviors. These behaviors are consistently associated with activation in reward-related brain areas, such as the striatum, and with prefrontal activity implicated in cognitive control, the processing of emotions, and integration of benefits and costs, consistent with resolution of a conflict between self-interest and other-regarding motives.
Introduction (Via Kellogg)
As in behaviorist psychology, the long-standing tradition in economic theory has been to treat preferences and beliefs as impossible or difficult to observe directly; instead, their effects were thought to be only revealed by direct choices. The emerging neuroeconomic approach [1–4] rejects the premise of unobservability, and seeks a microfoundation of social and economic activity in neural circuitry, using functional magnetic resonance imaging (fMRI), transcranial magnetic stimulation (TMS), pharmacological interventions and other techniques. The neuroeconomic approach hopes to unify mechanistic, mathematical and behavioral (choice-based) measures and constructs. Byproducts of such an ambitious program might include better understanding of individual differences and development over the human lifecycle (including disorders and expertise), insights into the effects of direct and social learning, empirical discipline of evolutionary modeling, and advice for how economic rules and institutions can be designed so that people react to rules in a socially efficient way.
Social Neuroeconomics: The Neural Circuitry Of Social Preferences
October 20, 2009
How does neuroeconomics change the basic methods of economics? Find out below
Click Here To Read The For Case Mindless Economics
Abstract (Via Princeton)
Neuroeconomics proposes radical changes in the methods of economics. This essay discusses the proposed changes in methodology, together with the the neuroeconomic critique of standard economics. We do not assess the contributions or promise of neuroeconomic research. Rather, we offer a response to the neuroeconomic critique of standard economics. This research was supported by grants from the National Science Foundation. We thank Drew Fudenberg and
Introduction (Via Princeton)
Neuroeconomics proposes radical changes in the methods of economics. This essay discusses the proposed changes in methodology, together with the the neuroeconomic critique of standard economics. Our definition of neuroeconomics includes research that makes no specific reference to neuroscience and is traditionally referred to as psychology and economics. We identify neuroeconomics as research that implicitly or explicitly makes either of the following two claims:
Assertion I: Psychological and physiological evidence (such as descriptions of hedonic
states and brain processes) are directly relevant to economic theories. In particular, they
can be used to support or reject economic models or even economic methodology.
Assertion II: What makes individuals happy (‘true utility’) differs from what they
choose. Economic welfare analysis should use true utility rather than the utilities governing
choice (‘choice utility’).
Click Here To Read The For Case Mindless Economics
October 20, 2009
Very brief overview of neurofinance it’s uses and contributions…
H/T Phil
Click Here To Learn About Money, Risk and the Brain
Abstract (Via Kellog)
In the past few years neurofinance has emerged as a new field in economics and finance. The small but growing number of economists and neuroscientists involved in this new field have a common goal: to understand how people make economic decisions by analyzing how the brain works when these choices are made. The rise of the field was generated by the failure of the standard rational agent model used by economists in the last 50 years to explain a significant number of decisions made by individuals. Deviations from the optimal choices predicted by the standard model have been documented in the behavioral economics and behavioral finance literature for two decades. However, we still do not have a parsimonious new model that can explain all behaviors exhibited by economic agents, including the so-called deviations from those predicted by the standard model.
Introduction (Via Kellog)
Neurofinance (also referred to as neuroeconomics) is trying to provide this new model of economic decision-making, based on how our brain operates when we are faced with choices. The failure of the standard model could potentially be caused by the lack of realism in its assumptions. Tools available to neuroeconomists allow for these assumptions to be tested — for instance, we can find out whether the brain tracks expected values, risk, or inter-temporal discount factors. By looking inside the brain we can create a more realistic model of decision-making which hopefully is both parsimonious, and able to explain a much wide range of individual economic behaviors compared to the standard model. This article will review some of the puzzles (or deviations from the standard model) documented in behavioral economics and behavioral finance, and then describe several neuroeconomics studies that try to explain these puzzles by examining brain activation during decision-making.
Excerpts (Via Kellog)
The potential to use brain scans to learn what people really like, dislike or can do, is the main reason why companies have started to conduct neuromarketing studies and measure brain activation while individuals are presented with various products.
Findings from neuroeconomics can be used by policy makers, too, in order to increase social welfare. For instance, if the government wants to encourage workers to save more for retirement, it may design markets or financial policies that trigger the right part of the limbic system to induce the desired behavior.
Click Here To Learn About Money, Risk and the Brain
October 16, 2009
Using neuroscience to understand risk taking, rationality, and decision making.
(H/T Phil Ordway)
Click Here To Learn About The Neural Basis of Financial Risk Taking
Abstract (Via Neuron)
Investors systematically deviate from rationality when making financial decisions, yet the mechanisms responsible for these deviations have not been identified. Using event-related fMRI, we examined whether anticipatory neural activity would predict optimal and suboptimal choices in a financial decision-making task. We characterized two types of deviations from the optimal investment strategy of a rational risk-neutral agent as risk-seeking mistakes and risk-aversion mistakes. Nucleus accumbens activation preceded risky choices as well as risk-seeking mistakes, while
anterior insula activation preceded riskless choices as well as risk-aversion mistakes. These findings suggest that distinct neural circuits linked to anticipatory affect promote different types of financial choices and indicate that excessive activation of these circuits may lead to investing mistakes. Thus, consideration of anticipatory neural mechanisms may add predictive power to the rational actor model of economic decision making.
Excerpt (Via Neuron)
Individual investors systematically deviate from optimal behavior, which could influence asset valuation (Daniel et al., 2002; Hirshleifer, 2001; Odean, 1998). The causes of these deviations have not been established, but emotion may have some influence. While some research has examined the role of emotion in decision making (Camerer et al., 2005; Loewenstein et al., 2001) and economists have begun to incorporate emotion into models of individual choice (Bernheim and Rangel, 2004; Caplin and Leahy, 2001), scientists still lack a mechanistic account of how emotion might influence choice. Understanding such mechanisms might help theorists to specify more accurate models of individual decision making, which could ultimately improve the design of economic institutions so as to facilitate optimal investor behavior.
Here, we sought to examine whether neural activation linked to anticipatory affect would predict financialchoices.
Click Here To Learn About The Neural Basis of Financial Risk Taking
October 16, 2009
Jason Zweig wrote one of my favorite primers on neuroeconomics, “Your Money & Your Brain”. Here’s a recent interview with Zweig at Morningstar.
Click Here To Read An Interview With Writer &Author Jason Zweig
(H/T AR)
Introduction (via Morningstar)
The field of behavioral finance examines the intersection between psychology and economic decision-making. In his fascinating recent book, Your Money and Your Brain, Wall Street Journal columnist Jason Zweig examines a heretofore little-known aspect of behavioral finance: neuroeconomics, or how our brains respond in real-life financial situations. I recently sat down with Jason to discuss investor behavior and his tips for becoming a better investor.
Excerpts (Via Morning Star)
Christine Benz: People may be familiar with behavioral finance. How is neuroeconomics different?
Jason Zweig: What neuroeconomics does is take the high-technology tools of contemporary neuroscience, which center on the ability to observe activation in the brain at the regional level. So you’re able to see which areas of the brain are activated under particular circumstances, and then you correlate that activity to behavior and also to the stimulus that triggered the activity in the first place.
Jason Zweig: In these particular experiments I was being asked to engage in a probability guessing experiment that required a lot of conscious thought, much like playing a game of checkers or backgammon. Simultaneously, I was being presented with a much more basic stimulus, which was that I was getting little sips of sugar water. And there was a pattern to the sips of sugar water that my conscious brain paid no attention to because I was trying to solve the more complicated problem. But the unconscious part of my brain soon detected what was happening with the sugar water. And the next thing I knew, I was pressing madly with my right index finger to indicate that I had solved the problem, even though I had no idea how I had done it. And it was simply that the pattern of sugar water had started to repeat and that part of my brain recognized this repetition, while the conscious part of my brain was still searching for a solution.
That sort of thing goes on all the time in the financial markets. And individual investors do it, and financial advisors too do it, without realizing it. You may end up investing more in a particular stock because you saw the CEO on TV and his necktie was your favorite color. It sounds absurd to think that people would make financial decisions based on irrelevant factors like that but they do. And the reason they do is that things like colors and sounds and smells and tastes and associations with our past and with ourselves increase our comfort and familiarity with a frightening world.
Click Here To Read An Interview With Writer &Author Jazon Zweig
August 21, 2009
How human oxytocin mediated empathy reveals moral sentiments.
(H/T Cynthia for finding this paper)
Click Here To Read About The Physiology Of Moral Sentiments
Introduction (Via SSRN)
Adam Smith made a persuasive case that moral sentiments are the foundation of ethical behaviors in his 1759 The Theory of Moral Sentiments. This view is still controversial as philosophers debate the extent of human morality. One type of moral behavior, assisting a stranger, has been shown by economists to be quite common in the laboratory and outside it. This paper presents the Empathy-Generosity-Punishment model that reveals the criticality of moral sentiments in producing prosocial behaviors. The model’s predictions are tested causally in three neuroeconomics experiments that directly intervene in the human brain to turn up and turn down moral sentiments. This approach provides direct evidence on the brain mechanisms the produce prosociality using a brain circuit called HOME (Human Oxytocin-Mediated Empathy). By characterizing the HOME circuit, I identify situations in which moral sentiments will be engaged or disengaged. Using this information, applications to health and welfare policies, organizational and institutional design, economic development, and happiness are presented.
Click Here To Read About The Physiology Of Moral Sentiments
April 8, 2009
I was lucky to meet Zweig at CIMA here’s his latest piece via the WSJ.
Click Here To Learn About Your Genetic Investing Personality Type
Article Introduction (Via Zweig @ WSJ)
Maybe your DNA made you do it.
Whatever investing mistake you have committed lately, there is probably a gene that is often associated with that behavior. Are you predestined to be the prisoner of your genetic code?
To find out, I recently spent a day at the University of Pittsburgh getting a battery of DNA analyses and brain scans. I consider myself a patient and disciplined investor, so I volunteered as a guinea pig in Ahmad Hariri’s imaging genetics lab to learn how my genes and brain activity shape my behavior. The results shocked me.
After I spit into a cup, Dr. Hariri had my DNA analyzed to find out which form I have of five genes that influence the brain circuits that generate decisions about risk and reward over time. His findings: In all five genes, I have a variant, or allele, that is sometimes associated with bad investing decisions.
Consider the FAAH gene. Roughly 25% of people with European ancestry carry the 385A allele of this gene. That tends to damp their brains’ fear circuitry and to intensify their brains’ reaction to the prospect of making money. I am one of those people.
Additional Article Excerpts (Via Zweig @ WSJ)
There is always a tug of war inside each of us between nature and nurture. But during scary times like these, says Dr. Hariri, “environmental stresses can play a critical role in unmasking any underlying biases determined by your genes.” In other words, bear markets give nature the upper hand. It is now harder than ever to stick to the disciplines that can override your genetic impulses, but it also has never been more important.
Click Here To Learn About Your Genetic Investing Personality Type
January 25, 2009
If your interested in learning about insider trading and piggybacking in the brokerage business I recommend two things. First, read the article below from Wharton Business School. Second, read a book called “Traders, Guns & Money”. I recommend “Traders, Guns, & Money” because you will learn more about the derivative business (than you ever cared to know) and indirectly about the financial crisis. Enjoy!
Click Here to Read About Insider Trading In The Brokerage Business
Definition Of Chinese Wall (Via Wikipedia)
In business, a Chinese Wall is an information barrier implemented within a firm to separate and isolate persons who make investment decisions from persons who are privy to undisclosed material information which may influence those decisions. This is a way of avoiding conflict of interest problems.
In general, all firms are required to develop, implement and enforce reasonable policies and procedures to safeguard insider information, and to ensure no improper trading occurs. Although specific procedures are not mandated, adopted practices must be formalized in writing and must be appropriate and sufficient. Procedures should address the following areas: education of employees, containment of inside information, restriction of transactions, and trading surveillance.
Article Introduction (Via Knowledge @ Wharton)
A belief that market makers at institutional brokerages are “naïve” providers of liquidity — uninformed players operating from behind a firm Chinese Wall — may itself be an uninformed presumption.
That’s the conclusion reached by two Wharton finance researchers in a recent paper exposing the “leakage” of insider trading information within brokerages by market makers, and suggesting that the practice may need additional regulation. The paper, titled “Who Are the Beneficiaries When Insiders Trade? An Examination of Piggybacking in the Brokerage Industry,” is co-authored by Christopher C. Géczy, director of the Wharton Wealth Management Initiative and an adjunct finance professor, and Jinghua Yan, a research analyst at Tykhe Capital. Both are Fellows at the Wharton Financial Institutions Center.
Market makers are specialized intermediaries, registered with the New York Stock Exchange and the NASDAQ, who provide liquidity through the buying and selling of large volumes of securities. The Wharton researchers, in a detailed parsing of four years of insider trading at 15 of Wall Street’s largest brokerages, find that market makers executing insider trades at these firms appear to act on information gleaned from those trades.
Article Excerpts (Via Knowledge @Wharton)
“Put another way, compared to their peers, market makers affiliated with the brokers used by insiders post more aggressive ask quotes during periods when insiders trade.”
“What we found is that there is a leakage somewhere along the lines in the information transmission channel between the investor — in this case, company insiders — and ultimate trades, and the way information is transmitted into the market in the form of buy or sell orders.”
“The type of information leakage (or piggybacking) present in the Martha Stewart case may actually be more generally present in the brokerage business than that single case may imply,” the paper states. ”
“All these things are part of a cloth that we have woven for ourselves in which regulatory authorities have a very difficult job with heavy resource demands, but one that we rely upon getting done well, efficiently and effectively,” Géczy says.”
Click Here to Read About Insider Trading In The Brokerage Business
January 21, 2009
Here is solid introduction to Bounded Rationality models-what they are, how they work, and their makeup. Also, the article highlights the potential use of bounded rationality models for policy making . Click Here To Skip The Introduction & Learn About Bounded Rationality & The Current Crisis
Background On Bounded Rationality (Via Economist View)
Different models of bounded rationality vary basic assumptions of the rational agent model in different ways. Some of those assumptions are:
- Utility is discounted over time in a consistent way- People have access to all relevant information
- All relevant information is expressed through market prices
- People can instantly weigh up the change in utility given by any buying or selling decision
- People act to maximise their utility
Therefore, the typical way to create a bounded rationality model is to relax one or more of these criteria.
Article Introduction (Via Economist View)
The discussion below looks at how governments ought to respond to the current problems in the economy if a key assumption of economic models, rationality, is dropped and replaced with an assumption that agents have bounded rationality:
Article Excerpts (Via Economist View)
“Whichever model of behaviour is assumed, policymakers should ask what the models indicate for macroeconomic policy. This question has been considered in a conference on “behavioural macroeconomics” at the Boston Federal Reserve in 2007.[2] No doubt the old solutions will work, given enough time. But today, with a much better understanding of economic behaviour, we could design more sophisticated solutions which would work faster.”
“A clear example comes from the concept of anchoring. Anchoring creates a tendency to fixate on one option too long when we might profitably switch to another – it limits the effects of all kinds of quantitative changes in policy.”
“The paradoxical conclusion is that it may not matter what new institutions or new rules are designed – as long as something is done. Any new framework gives agents a reason to abandon their anchor to fear; and gives them a chance to reattach themselves to hope. This – the converse of Keynes’ paradox of thrift – is what will ultimately rescue the world economy.”
Click Here To Learn About Bounded Rationality & The Current Crisis
