More Brains!

[andrewducker]

Brain Experts Now Follow the Money is an article at the NY Times expanding on the study into why people make the decisions they do.
Much better than the one a few days ago, it goes into a fair bit of detail.

These researchers are busy scanning the brains of people as they make economic decisions, barter, compete, cooperate, defect, punish, engage in auctions, gamble and calculate their next economic moves. Based on their understanding of how fluctuations in neurons and brain chemicals drive those behaviors, the neuroscientists are expressing their findings in differential equations and other mathematical language beloved by economists.

Dr. Jonathan D. Cohen, a professor of cognitive neuroscience at Princeton, agreed. "Most economists don't base their theories on people's actual behavior," he said. "They study idealized versions of human behavior, which they assume is optimal in achieving gains."

In making short-term predictions, neural systems tap into gut feelings and emotions, comparing what we know from the past with what is happening right now.

The brain needs a way to compare and evaluate objects, people, events, memories, internal states and the perceived needs of others so that it can make choices. It does so by assigning relative value to everything that happens. But instead of dollars and cents, the brain relies on the firing rates of a number of neurotransmitters — the chemicals, like dopamine, that transmit nerve impulses. Novelty, money, cocaine, a delicious meal and a beautiful face all activate dopamine circuits to varying degrees; exactly how much dopamine an individual generates in response to a particular reward is calibrated by past experience and by one's own biological makeup.

¶Specific brain circuits monitor how people weigh different sources of rewards or punishments and how they allocate their attention. A region called the anterior cingulate reacts when people make mistakes or perform poorly; some neuroscientists say it also registers gains and losses, financial and otherwise. A small structure called the insula detects sensations in the body. It is also involved in assessing whether to trust someone offering to sell us the Brooklyn Bridge.

These structures and neurotransmitter systems are activated before a person is conscious of having made a decision, Dr. Cohen said.

Brain images showed that when players accepted an offer they viewed as fair enough, a circuit in the front of their brains that supports deliberative thinking was activated.

But when they rejected an offer, the insula — which monitors bodily states, including disgust — overrode the frontal circuit. The more strongly the insula fired, the more rapidly the person rejected the offer, Dr. Cohen said. Moreover, the insula fired well before the person pushed the button to refuse an offer.

Bullish investors have different patterns of dopamine release compared with bearish investors, he said. And in a game of mutual trust, women's brains show a big dopamine or reward response when they are trusted by others; there is no such response in men's brains.

In the prisoner's dilemma, which tests a person's willingness to cooperate or defect, players show a particular pattern of neural firing before they betray another player. Cooperation is captured in dopamine flows. Similarly, it is possible to trace circuits activated when people anticipate making or losing money, decide to trust a stranger or punish freeloaders in a game of sharing public goods.

When uncertainty is high, as in gambling situations, the brain can get high on dopamine and even become addicted to it. ... It feels better to get nothing when you expect $10 compared to getting nothing when you expect $90, researchers say.

Dr. Montague says the brain seizes on patterns and deludes itself into thinking that short sequences predict long ones. For example, after flipping three tails in a row, many people expect the next toss to be heads. By contrast, if a stock does well two quarters in a row, they expect it to continue doing well. Such intuitions lead people to adopt a false sense of confidence and tolerate losses for longer than they should, he said.

"Under the influence of powerful emotions or drives, people often end up doing the opposite of what they think is best for themselves, even at the moment of acting," he said. For example, many people will choose a small reward that arrives soon as opposed to a larger reward that arrives later. The future is uncertain. Why wait?

Comments

[kpollock.livejournal.com]

For example, after flipping three tails in a row, many people expect the next toss to be heads. By contrast, if a stock does well two quarters in a row, they expect it to continue doing well. Such intuitions lead people to adopt a false sense of confidence and tolerate losses for longer than they should, he said.


Nice to them admit that stock prices are effectively random :-)

If you show a trader made up figures for a stock/option/bond etc (or multiple stocks) with dates, they invent plausible explanations for the random ups and downs based on their 'market knowledge'. I found that very interesting. We actually did this (as a prank) at one place in which I worked. There are very few fundamentals in the market, in my view it operates mainly like fashion. (and is run on rumour and gossip - very very human!!)