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 financial choices.