Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility
AbstractWe use measures of neural activity provided by functional magnetic resonance imaging (fMRI) to test the "realization utility" theory of investor behavior, which posits that people derive utility directly from the act of realizing gains and losses. Subjects traded stocks in an experimental market while we measured their brain activity. We find that all subjects exhibit a strong disposition effect in their trading, even though it is suboptimal. Consistent with the realization utility explanation for this behavior, we find that activity in the ventromedial prefrontal cortex, an area known to encode the value of options during choices, correlates with the capital gains of potential trades; that the neural measures of realization utility correlate across subjects with their individual tendency to exhibit a disposition effect; and that activity in the ventral striatum, an area known to encode information about changes in the present value of experienced utility, exhibits a positive response when subjects realize capital gains. These results provide support for the realization utility model and, more generally, demonstrate how neural data can be helpful in testing models of investor behavior.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18562.
Date of creation: Nov 2012
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Find related papers by JEL classification:
- G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-CFN-2012-12-06 (Corporate Finance)
- NEP-EVO-2012-12-06 (Evolutionary Economics)
- NEP-EXP-2012-12-06 (Experimental Economics)
- NEP-NEU-2012-12-06 (Neuroeconomics)
- NEP-UPT-2012-12-06 (Utility Models & Prospect Theory)
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- Kohsaka Youki & Grzegorz Mardyla & Shinji Takenaka & Yoshiro Tsutsui, 2013. "Disposition Effect and Diminishing Sensitivity: An Analysis Based on a Simulated Experimental Stock Market," Discussion Papers in Economics and Business 13-02-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Dec 2013.
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