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Specific brain area may aid stock market success

Specific brain area may aid stock market success

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.

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