The Neural Basis of Financial Risk Taking
AbstractInvestors systematically deviate from rationality when making financial decisions, yet the mechanisms responsible for these deviations have not been identified. Using event-related fMRI, we examined whether anticipatory neural activity would predict optimal and suboptimal choices in a financial decision-making task. We characterized two types of deviations from the optimal investment strategy of a rational risk- neutral agent as risk-seeking mistakes and risk-aversion mistakes. Nucleus accumbens activation preceded risky choices as well as risk- seeking mistakes, while anterior insula activation preceded riskless choices as well as risk-aversion mistakes. These findings suggest that distinct neural circuits linked to anticipatory affect promote different types of financial choices, and indicate that excessive activation of these circuits may lead to investing mistakes. Thus, consideration of anticipatory neural mechanisms may add predictive power to the rational actor model of economic decision-making.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Experimental with number 0509001.
Length: 46 pages
Date of creation: 06 Sep 2005
Date of revision:
Note: Type of Document - pdf; pages: 46. Published in Neuron, Vol. 47, 763-770, September 1, 2005.
Contact details of provider:
Web page: http://22.214.171.124
neuroeconomics; neurofinance; brain; investing; emotions; affect;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-09 (All new papers)
- NEP-BEC-2005-11-09 (Business Economics)
- NEP-CBE-2005-11-09 (Cognitive & Behavioural Economics)
- NEP-EXP-2005-11-09 (Experimental Economics)
- NEP-FIN-2005-11-09 (Finance)
- NEP-FMK-2005-11-09 (Financial Markets)
- NEP-MIC-2005-11-09 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Colin Camerer & George Loewenstein & Drazen Prelec, 2003. "Neuroeconomics: How neuroscience can inform economics," Levine's Bibliography 506439000000000484, UCLA Department of Economics.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Rabin, Matthew, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series qt731230f8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- B. Douglas Bernheim & Antonio Rangel, 2003.
"Addiction and Cue-Conditioned Cognitive Processes,"
NajEcon Working Paper Reviews
- repec:aea:jeclit:v:43:y:2005:i:1:p:9-64 is not listed on IDEAS
- Caplin, Andrew & Leahy, John, 1997.
"Psychological Expected Utility Theory and Anticipatory Feelings,"
97-37, C.V. Starr Center for Applied Economics, New York University.
- Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory And Anticipatory Feelings," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 55-79, February.
- Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
- Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley.
- David Hirshleifer, 2001.
"Investor Psychology and Asset Pricing,"
Journal of Finance,
American Finance Association, vol. 56(4), pages 1533-1597, 08.
- Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
- Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
- Alessandro Bucciol & Luca Zarri, 2013. "Financial Risk Aversion and Personal Life History," Working Papers 05/2013, University of Verona, Department of Economics.
- Baddeley, M. & Burke, C. & Schultz, W. & Tobler, P., 2012. "Herding in Financial Behaviour: A Behavioural and Neuroeconomic Analysis of Individual Differences," Cambridge Working Papers in Economics 1225, Faculty of Economics, University of Cambridge.
- van Winden, Frans & Krawczyk, Michal & Hopfensitz, Astrid, 2011.
"Investment, resolution of risk, and the role of affect,"
Journal of Economic Psychology,
Elsevier, vol. 32(6), pages 918-939.
- Hopfensitz, Astrid & Krawczyk, Michal & Van Winden, Frans, 2009. "Investment, Resolution of Risk, and the Role of Affect," TSE Working Papers 09-123, Toulouse School of Economics (TSE).
- Hopfensitz, Astrid & Krawczyk, Michal & van Winden, Frans A.A.M., 2008. "Investment, Resolution of Risk, and the Role of Affect," CEPR Discussion Papers 6822, C.E.P.R. Discussion Papers.
- Frans Van Winden & Michal Krawczyk & Astrid Hopfensitz, 2010. "Investment, Resolution of Risk, and the Role of Affect," CESifo Working Paper Series 2975, CESifo Group Munich.
- Frans van Winden & Michal Krawczyk & Astrid Hopfensitz, 2008. "Investment, Resolution of Risk, and the Role of Affect," Tinbergen Institute Discussion Papers 08-047/1, Tinbergen Institute.
- Knutson, Brian & Wimmer, G. Elliott & Kuhnen, Camelia & Winkielman, Piotr, 2008. "Nucleus accumbens activation mediates the influence of reward cues on financial risk-taking," MPRA Paper 8013, University Library of Munich, Germany.
- Ridderinkhof, Richard & Stallen, Mirre & van Winden, Frans A.A.M., 2008. "On the Nature, Modeling, and Neural Bases of Social Ties," CEPR Discussion Papers 6950, C.E.P.R. Discussion Papers.
- Roe, Brian E. & Haab, Timothy C. & Beversdorf, David Q. & Gu, Howard H. & Tilley, Michael R., 2009. "Risk-attitude selection bias in subject pools for experiments involving neuroimaging and blood samples," Journal of Economic Psychology, Elsevier, vol. 30(2), pages 181-189, April.
- Guiso, Luigi & Sodini, Paolo, 2012.
"Household Finance: An Emerging Field,"
CEPR Discussion Papers
8934, C.E.P.R. Discussion Papers.
- Mogilner, Cassie & Aaker, Jennifer L. & Pennington, Ginger L., 2007. "Time Will Tell: The Distant Appeal of Promotion and Imminent Appeal of Prevention," Research Papers 1914, Stanford University, Graduate School of Business.
- B. Douglas Bernheim, 2009.
"On the Potential of Neuroeconomics: A Critical (but Hopeful) Appraisal,"
American Economic Journal: Microeconomics,
American Economic Association, vol. 1(2), pages 1-41, August.
- B. Douglas Bernheim, 2008. "On the Potential of Neuroeconomics: A Critical (but Hopeful) Appraisal," NBER Working Papers 13954, National Bureau of Economic Research, Inc.
- David, Cesarini & Dawes, Christopher T. & Johannesson, Magnus & Lichtenstein, Paul & Wallace, Björn, 2007.
"Genetic Variation in Preferences for Giving and Risk-Taking,"
Working Paper Series in Economics and Finance
679, Stockholm School of Economics, revised 12 Jan 2009.
- David Cesarini & Christopher T. Dawes & Magnus Johannesson & Paul Lichtenstein & Björn Wallace, 2009. "Genetic Variation in Preferences for Giving and Risk Taking," The Quarterly Journal of Economics, MIT Press, vol. 124(2), pages 809-842, May.
- Sebastian Lehmann & Martin Reimann, 2012. "The influence of time and money on product evaluations - a neurophysiological analysis," FEMM Working Papers 120011, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
- Ramsøy, Thomas Z. & Skov, Martin, 2010. "How genes make up your mind: Individual biological differences and value-based decisions," Journal of Economic Psychology, Elsevier, vol. 31(5), pages 818-831, October.
- Kenning, Peter & Mohr, Peter & Erk, Susanne & Walter, Henrik & Plassmann, Hilke, 2006. "The role of fear in home-biased decision making: first insights from neuroeconomics," MPRA Paper 1076, University Library of Munich, Germany, revised 18 Nov 2006.
- Kuhnen, Camelia & Knutson, Brian, 2008.
"The Influence of Affect on Beliefs, Preferences and Financial Decisions,"
10410, University Library of Munich, Germany.
- Kuhnen, Camelia M. & Knutson, Brian, 2011. "The Influence of Affect on Beliefs, Preferences, and Financial Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(03), pages 605-626, June.
- Reimann, Martin & Bechara, Antoine, 2010. "The somatic marker framework as a neurological theory of decision-making: Review, conceptual comparisons, and future neuroeconomics research," Journal of Economic Psychology, Elsevier, vol. 31(5), pages 767-776, October.
- Kuhnen, Camelia M., 2012. "Asymmetric learning from financial information," MPRA Paper 39412, University Library of Munich, Germany.
- Kazuhiro Miyagawa & Tadanobu Misawa & Tetsuya Shimokawa, 2011. "The role of the orbitofrontal cortex in human adaptive learning under strategic environments," Economics Bulletin, AccessEcon, vol. 31(3), pages 2284-2297.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.