Brain Activity Follow Up of Stock Market Financial Variables

The Journal of Finance, 2014

We use measures of neural activity provided by functional magnetic resonance imaging (fMRI) to test the "realization utility" theory of investor behavior, which posits that people derive utility directly from the act of realizing gains and losses. Subjects traded stocks in an experimental market while we measured their brain activity. We find that all subjects exhibit a strong disposition effect in their trading, even though it is suboptimal. Consistent with the realization utility explanation for this behavior, we find that activity in the ventromedial prefrontal cortex, an area known to encode the value of options during choices, correlates with the capital gains of potential trades; that the neural measures of realization utility correlate across subjects with their individual tendency to exhibit a disposition effect; and that activity in the ventral striatum, an area known to encode information about changes in the present value of experienced utility, exhibits a positive response when subjects realize capital gains. These results provide support for the realization utility model and, more generally, demonstrate how neural data can be helpful in testing models of investor behavior.

Social Science Research Network, 2020

What happens when information reaches the human brain? In economics, a black-box approach to information processing in the brain is generally taken with an implicit assumption that information, once it reaches the brain, is accurately processed. In sharp contrast, research in brain sciences has established that when information reaches the brain, a mental template or schema (neural substrate of knowledge) is first activated, which influences information absorption. Schemas are created through a resource intensive process in which finite brain resources are allocated to different tasks, with resource allocation in the brain having an impact on the structure of schemas. In this article, we explore the implications of this richer view from brain sciences for the capital asset pricing model (CAPM). We show that two versions of CAPM arise depending on how the brain resources are allocated in schema creation. In one version, the relationship between beta and expected returns is flat along with value and size effects. In the second version, the relationship between beta and expected return is strongly positive with an implied risk-free rate which could be negative. The two version CAPM provides a unified explanation for a series of empirical findings including high-alpha-of-low-beta, size and value effect as well as strongly positive relationship between beta and average stock returns at specific times such as on macroeconomic announcement days, and at market open. As certain morbidities, such as autism, are thought to be associated with lack of schemas that attenuate information, a laboratory experiment with high functioning autism sufferers might be our best bet at observing the classical CAPM in its full glory.

Literature in finance and neurosciences shows that male and female differ on many relevant issues concerning financial decision investment. Here, we studied the EEG activity recorded while volunteers were playing a stock trading game to investigate these gender differences. 20 males and 20 females made 100 trading decisions using a portfolio of 200 shares of 7 different companies. Males and females were equally successful in earning above the market. sLORETA was used to identify sources of EEG recorded 2 seconds before trading decision. Results showed that male and female use different sets of neuron to make equally successful financial decisions.

Neurological Sciences and Neurophysiology

Functional imaging studies offer alternative explanations for the neural correlates of monetary gain and loss related brain activity, and their opponents, omission of gains and losses. One possible explanation based on the psychology of opponent process theory suggests that successful avoidance of an aversive outcome is itself rewarding, and hence activates brain regions involved in reward processing. In order to test this hypothesis, we compared brain activation for successful avoidance of losses and receipt of monetary gains. Additionally, the brain regions involved in processing of frustrative neutral outcomes and actual losses were compared in order to test whether these two representations are coded in common or distinct brain regions. Methods: Using a 3 Tesla functional magnetic resonance imaging machine, fifteen healthy volunteers between the ages 22 to 28 were scanned for blood oxygen level dependent signal changes while they were performing a probabilistic learning task, wherein each trial a participant chose one of the two available options in order to win or avoid losing money. Results: The results confirmed, previous findings showing that medial frontal cortex and ventral striatum show significant activation (p<0.001) not only for monetary gains but also for successful avoidance of losses. A similar activation pattern was also observed for monetary losses and avoidance of gains in the medial frontal cortex, and posterior cingulate cortex, however, there was increased activation in amygdala specific to monetary losses (p<0.001). Further, subtraction analysis showed that regardless of the type of loss (i.e., frustrative neutral outcomes) posterior insula showed increased activation. Conclusion: This study provides evidence for a significant overlap not only between gains and losses, but also between their opponents. The results suggested that the overlapping activity pattern in the medial frontal cortex could be explained by a more abstract function of medial frontal cortex, such as outcome evaluation or performance monitoring, which possibly does not differentiate between winning and losing monetary outcomes.

SSRN Electronic Journal, 2017

In this paper, we address theoretical developments of choice models in the financial field, starting with the famous efficient market hypothesis (EMH) in financial markets and its implications, then moving on to a review of the theoretical and empirical challenges posed by psychological and behavioral studies to the EMH, paying particular attention, once again, to these arguments' implications on the activity of financial operators. Finally, we look at the most recent studies aimed at identifying the neurophysiological links of financial choices.

2010

Much of the academic finance theory is based on the assumption that individuals act rationally and behavioral finances treats investors' choice based by behavioral biases. In contrast, neurofinance (as a blending of psychology, neurology and finance) attempts to understand behavior by examining the physiological processes in the human brain when exposed to financial risk. Scientists map the mind to learn how fear and greed drive the financial markets. The paper, will briefly present why neurofinance is important and how will be able to provide in the near future a number of effective tools for improved financial decision making.

THE USE OF NEUROSCIENCE IN UNDERSTANDING FINANCIAL BEHAVIOR (Atena Editora), 2022

This article approaches financial education within the context of neuroscience and how its study is able to help in the understanding of decision-making and financial behaviors. Such an approach is necessary due to the great difficulty found in changing financial behaviors based on consumption and quick rewards, as seen on a large scale in Brazil. The purpose of this study is to conceptualize some of the various neurological aspects that happen in the human brain at all times, and how the understanding of its functioning can help the understanding of the financial profile of each individual, enabling the construction of healthy financial habits with a greater understanding of their neural triggers, providing better control over changing financial behavior. This purpose is achieved through a literature review, where secondary data were collected through document analysis. This work proposes a discussion between neuroscience and the study of financial education, which has shown that, based on neuroscience principles learned during the process, it is possible to identify how the human brain reacts when faced with the need to change behavior, as well as new information to be treated about finances, thus being able to understand how the brain will instinctively respond, and inferring the possibility of making use of these factors to help financial change in a more assertive and lasting way.

Jamshedpur Research Review, 2023

Neuro-economics is an interdisciplinary field that merges principles from neuroscience, economics, and psychology to explore the neural underpinnings of decision-making and economic behaviour. This research aims to uncover the fundamental mechanisms that govern how individuals make choices and engage in economic transactions. By employing a variety of neuro-imaging techniques, such as functional magnetic resonance imaging (FMRI) and electroencephalography (EEG), researchers can investigate the neural correlates associated with different economic phenomena. This study presents an overview of the current state of research in neuro-economics, focusing on key findings and methodologies employed. First, it examines the neural processes involved in economic decisionmaking, including the evaluation of rewards and costs, risk assessment, and inter-temporal choices. Studies have identified brain regions such as the prefrontal cortex, striatum, and insula as critical nodes within decision-making networks. Furthermore, the study highlights the role of emotions in economic behaviour. Emotion regulation and affective responses have been shown to significantly influence economic decisions, and neuro-imaging studies have provided insights into the neural circuits underlying emotional processing during economic tasks. The interaction between emotional and cognitive systems plays a pivotal role in shaping economic behaviour. Additionally, the study emphasizes the influence of social factors on economic decision-making. Researchers have examined how social preferences, fairness considerations, and trust impact economic behaviour, and neuroimaging techniques have provided valuable insights into the neural mechanisms underlying social interactions and their economic outcomes. Lastly, the study discusses the potential applications of neuro-economics in various domains, including public policy, marketing, and finance. Understanding the neural correlates of economic behaviour has the potential to inform interventions and policies aimed at improving decision-making and optimizing outcomes in both individual and societal contexts. Thus, neuro-economics represents a promising approach to unraveling the intricate relationship between the brain, decision-making, and economic behaviour. By combining insights from neuroscience and economics, this field offers valuable insights into the neural processes that shape human choices, emotions, and social interactions, paving the way for new advancements in understanding economic behaviour and its applications in diverse domains.

The Journal of Finance, 2010

Experimental evidence has consistently confirmed the ability of uninformed traders, even novices, to infer information from the trading process. After contrasting brain activation in subjects watching markets with and without insiders, we hypothesize that Theory of Mind (ToM) helps explain this pattern, where ToM refers to the human capacity to discern malicious or benevolent intent. We find that skill in predicting price changes in markets with insiders correlates with scores on two ToM tests. We document GARCH-like persistence in transaction price changes that may help investors read markets when there are insiders.

Frontiers in human neuroscience, 2010

Like other species, humans are sensitive to the decisions and actions of conspecifics, which can lead to herd behavior and undesirable outcomes such as stock market bubbles and bank runs. However, how the brain processes this socially derived influence is only poorly understood. Using functional magnetic resonance imaging (fMRI), we scanned participants as they made decisions on whether to buy stocks after observing others' buying decisions. We demonstrate that activity in the ventral striatum, an area heavily implicated in reward processing, tracked the degree of influence on participants' decisions arising from the observation of other peoples' decisions. The signal did not track non-human, non-social control decisions. These findings lend weight to the notion that the ventral striatum is involved in the processing of complex social aspects of decision making and identify a possible neural basis for herd behavior. Frontiers in Human Neuroscience www.frontiersin.org June 2010 | Volume 4 | Article 48 | 2 Burke et al. Striatal activity reflects herd behavior June 2010 | Volume 4 | Article 48 | 11 Burke et al. Striatal activity reflects herd behavior herd information on financial decisions. Front. Hum. Neurosci. 4:48.