If you're so smart, why aren't you rich? It may be that, when it comes to stock mar­ket suc­cess, your brain is heed­ing the wrong neu­ral sig­nals.

In a new stu­dy, sci­en­tists found that, when they sim­u­lat­ed mar­ket con­di­tions for groups of in­vestors, eco­nom­ic bub­bles-in which the price of some­thing could dif­fer greatly from its ac­tu­al val­ue-in­variably formed. They al­so found a link be­tween spe­cif­ic brain ac­ti­vity pat­terns and sen­si­ti­vity to those bub­bles.

“S­tock mar­ket bub­bles form when peo­ple col­lec­tively over­val­ue some­thing, cre­at­ing what econ­o­mist Al­an Greenspan once fa­mously called ‘irra­t­ional ex­u­ber­ance,'” said Read Mon­tague, di­rec­tor of the Hu­man Neu­roimag­ing Lab­o­r­a­to­ry at the Vir­gin­ia Tech's Car­il­ion Re­search In­sti­tute and one of the stu­dy's sen­ior au­thors. “Our ex­pe­ri­ments showed how the col­lec­tive be­hav­ior of mar­ket par­ti­ci­pants cre­at­ed price bub­bles.”

The study is pub­lished this week in the jour­nal Pro­ceed­ings of the Na­t­ional Acad­e­my of Sci­ences.

Mon­tague and col­leagues en­rolled 320 play­ers in a mar­ket-trad­ing sim­ula­t­ion game. Up to two doz­en par­ti­ci­pants played in each of 16 mar­ket ses­sions, with two or three par­ti­ci­pants sim­ultaneously hav­ing their brains scanned us­ing func­tion­al mag­net­ic res­o­nance im­ag­ing, or fMRI, a tech­nique that al­lows sci­en­tists to meas­ure brain ac­ti­vity based on mi­cro­scop­ic blood-flow meas­urements.

At some point dur­ing the 50 trad­ing pe­ri­ods of each ses­sion, a price bub­ble would in­variably form and crash. The sci­en­tists had sus­pected that crowd cog­ni­tion would re­sult in some bub­ble forma­t­ion, though they had not ex­pected it to hap­pen eve­ry time.

What sur­prised the sci­en­tists even more were the dis­tinc­tive brain ac­ti­vity pat­terns that emerged among the low earn­ers and high earn­ers. Traders who bought more ag­gres­sively based on ac­ti­vity in one brain re­gion, the nu­cle­us ac­cum­bens, earned less.

In con­trast, the high earn­ers seemed to ig­nore nu­cle­us ac­cum­bens ac­ti­vity in fa­vor of the an­te­ri­or in­su­lar cor­tex, a brain ar­ea ac­tive dur­ing bodily dis­com­fort and un­pleas­ant emo­tion­al states.

Just be­fore a bub­ble peak­ed – as their brain scans were re­veal­ing an in­creased ac­ti­vity in the an­te­ri­or in­su­la – the high earn­ers would beg­in to sell their shares. The sci­en­tists be­lieve the high earn­ers' brain ac­ti­vity may rep­re­sent a neu­ral early warn­ing sig­nal of an im­pend­ing crash.

“It's no­to­ri­ously hard to iden­ti­fy stock mar­ket bub­bles and pre­dict crashes by track­ing price fluctua­t­ions alone,” said Col­in Camerer, a be­hav­ioral econ­o­mist at Cal­tech and the stu­dy's oth­er sen­ior au­thor. The new method “is ide­al for un­der­stand­ing the neu­ropsy­chol­ogy of bub­ble forma­t­ion, be­cause we can con­trol the fun­da­men­tal val­ues and use both prices and brain ac­ti­vity to fig­ure out why bub­bles form and crash.”

The mod­el may al­so shed light on oth­er con­texts in which groups – and in­di­vid­u­als – over­val­ue some­thing, Mon­tague said. “This neurobe­hav­ioral met­ric could be used to help quantify situa­t­ions in which peo­ple place ex­ces­sive val­ue on poor choices, such as drug ad­dic­tion, com­pul­sive gam­bling, or over­eat­ing,” he said.