Sunday, November 02, 2008

Neuroeconomics: How Brains Affect Our Gains

* How Neuroscience Interfaces With Economics - Excellent overview of the field of neuroeconomics.

* Wired for Irrationality? - This Business Week summary examines why logic takes a backseat with much decision making.

* How Brains Deal With Uncertainty - This research finds that brain mechanisms for dealing with uncertainty that develops over short time periods (as in trading) are different from those that deal with uncertainty that depends upon past learned associations. Might you be able to differentiate successful from unsuccessful short-term traders from their patterns of brain activation while making decisions?

* Intriguing Review of Cognitive Neuroscience Research
- This article suggests that a variety of disorders have, at their root, a dysfunction in how neural activity in different areas is coordinated: "The impairments of neural synchrony observed in schizophrenia, autism, and AD [Alzheimer's Disease] are consistent with current theories that emphasize a disconnection syndrome as the underlying pathophysiological mechanism. According to these theories, cognitive dysfunctions as well as the overt symptoms of these disorders arise from a dysfunction in the coordination of distributed neural activity between and within functionally specialized regions of the cerebral cortex." Might it be the case that some individuals have exceptionally well developed neural coordination, accounting for distinctive cognitive performance?

* Risk Seeking? - In this study, monkeys are a choice between two alternatives: both lead to the same mean reward, but one choice has higher variability than the other. Like some traders, monkeys show a preference for the risky (high variation) choices, and an area of their brains responsible for the processing of rewards is implicated.

* Prepare for the Worst? - This study finds that, when people are led to expect visual stimuli that are pleasant or unpleasant, they activate the parts of the brain appropriate for each. When they are led to expect unknown stimuli, however, they activate the areas appropriate for unpleasant reactions. Such a "pessimistic bias" make may sense, as the authors note: "Since we do not know what future holds for us, we prepare for expected emotional events in order to deal with a pleasant or threatening environment. From an evolutionary perspective, it makes sense to be particularly prepared for the worst-case scenario." Might we see a different pattern of activation among problem gamblers and addictive traders?


IWave said...

I do not buy the psychology stuff fully - maybe years ago It was alike. Nowadays is just excess alghoritmics, brokers dust and tricks of reassesment of complex wrong born markowitz impressive sizes of pfolios globe wide..

Btw am excerpting a NYT piece of today, calling for the problem to be FUNDAMENTAL NOT MENTAL as I love to say.

"“There’s absolutely going to be a lot of pain to go around,” said Josh Lerner, a professor of investment banking at Harvard Business School. “The big question is how apocalyptic it will be.”

fisherking61 said...

Dear Dr. Steenbarger,
Excellent post, as always, I am an avid reader of your books. Just one question: I seem to recall some recent research confirming that two separate parts of the brain - on being the hippocampus - deal with fight-or-flight instincts. By any chance, would yuoi clarify which part deal with what and have some of the empirical research links, please?
Many thanks in advance.
Keep the Good Job !

Luca from Lausanne, Switzerland

David said...

"From an evolutionary perspective, it makes sense to be particularly prepared for the worst-case scenario."

The wild animals that respond appropriately to the change of the seasons do best (on average)and that is purely outside of them. Monkey's and other social animals may be asked to make decisions in tests but the social dynamic is not effectively controlled for. Gamblers and addictive traders do not share their compulsions consistently in a social setting for comparison or even fully recognize them.
The (right) social setting for each individual's decisions is one that provides useful input to compare and filter different or confirming ideas. (a little like this blog!)What if the social setting has seasonality too? How do you control for that? Thanks Dr. Brett.

Dr Bruce Hong said...

I personally think that the field of Neuroeconomics is in transition. Many of the articles that I've reaqd include an economist and a psychologist. I sometimes wonder whether they really understand each others' disciplines. Eventually, we should get academicians who have been cross-trained in both disciplines and the quality of the research and our understanding should improve.

Meanwhile, the Business Week article seems to summarize this best. When we make economic decisions that are contrary to our own self-interest, we should suspect that a lower, more primitive and emotional part of the brain has gotten involved. Aaaahh. But how to curb that little monkey!!!


Johan Lindén said...

Impressive collection there Doc!

Thanks a lot!

Johan from Sweden