How Brains Make Money
You and I would look at Wall Street and see the epitome of capitalism, a place where the marketplace, while more manic than in times past, still drives decisions.
But a group of scientists gathering today for a conference in Miami would see it differently. They would argue that if you really want to understand why investors and traders behave the way they do, you need to look inside their brains.
Meet the neuroeconomists, pioneers of sorts in an emerging field based on the notion that financial decisions have their roots in neuron connections. They’re building a science around using brain scans to try to figure out what’s going on when people choose to chase rewards, or conversely, avoid risk. They’re also hoping this will help them understand why people make irrational choices, even when the reasoning part of their minds seems to know better.
My brain says you disgust me
Josh Fischman, writing in the Chronicle of Higher Education details some of the observations neuroeconomists have made during their brain imaging experiments. For starters, they say that when people reject what they feel is a lowball offer, a part of their brain associated with disgust, called the insula, gets active. In fact, it’s more active than the part of the brain linked to reasoned calculation, suggesting that in that situation, a person’s negative emotion-to make sure the cheapstake doesn’t win-trumps a more rational one.
Scientists have also analyzed the brain’s response when someone feels they’ve spent too much for something. The region of the brain called the striatum, often linked to rewards, gets particularly active when people overpay because they’re afraid of losing something.
In short, based on what their brains reflected, subjects in the research seemed to be more motivated by the fear of losing than the joy of winning. And that, neuroeconomists contend, could help explain why people will hold on to losing stocks too long-they want to avoid acknowledging a loss.