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The role of fear in home-biased decision making: first insights from neuroeconomics

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  • Kenning, Peter
  • Mohr, Peter
  • Erk, Susanne
  • Walter, Henrik
  • Plassmann, Hilke

Abstract

We used functional magnetic resonance imaging (“fMRI”) to investigate the neural mechanisms underlying home–biased, financial decision-making. Twenty-eight subjects were instructed to make binary investment decisions between a foreign and a domestic mutual fund. Differential brain activity was detected between decisions involving funds of different national origins. In situations where participants had to decide between mutual funds from different countries, we found increased activity in the precentral gyrus, the fusiform gyrus and the inferior occipital gyrus. Moreover, during home-biased decisions we found a correlation between activity within the amygdala- hippocampal regions of the brain and the investor’s general risk aversion. This region has been found to be involved in negative emotional processing such as fear, so one interpretation is that home-biased financial decision making is modulated by negative emotions associated with risk aversion.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1076.

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Date of creation: 01 Aug 2006
Date of revision: 18 Nov 2006
Handle: RePEc:pra:mprapa:1076

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Keywords: Financial Decision-Making; Home-Bias; fMRI; Neuroeconomics;

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  1. B. Douglas Bernheim & Daniel M. Garrett, 1996. "The Determinants and Consequences of Financial Education in the Workplace: Evidence from a Survey of Households," NBER Working Papers 5667, National Bureau of Economic Research, Inc.
  2. Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, 06.
  3. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA.
  4. Mark Loewenstein & Gregory A. Willard, 2006. "The Limits of Investor Behavior," Journal of Finance, American Finance Association, vol. 61(1), pages 231-258, 02.
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  7. Karolyi, G. Andrew & Stulz, Rene M., 2003. "Are financial assets priced locally or globally?," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 16, pages 975-1020 Elsevier.
  8. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  9. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  10. Camelia Kuhnen & Brian Knutson, 2005. "The Neural Basis of Financial Risk Taking," Experimental 0509001, EconWPA.
  11. H. M. Shefrin & Richard Thaler, 1977. "An Economic Theory of Self-Control," NBER Working Papers 0208, National Bureau of Economic Research, Inc.
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