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The Neural Basis of Financial Risk Taking

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Author Info

  • Camelia Kuhnen

    (Stanford Graduate School of Business)

  • Brian Knutson

    (Stanford University Department of Psychology)

Abstract

Investors 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.

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File URL: http://128.118.178.162/eps/exp/papers/0509/0509001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Experimental with number 0509001.

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Length: 46 pages
Date of creation: 06 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpex:0509001

Note: Type of Document - pdf; pages: 46. Published in Neuron, Vol. 47, 763-770, September 1, 2005.
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Web page: http://128.118.178.162

Related research

Keywords: neuroeconomics; neurofinance; brain; investing; emotions; affect;

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References

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  1. Matthew Rabin, 2001. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Method and Hist of Econ Thought 0012001, EconWPA.
  2. B. Douglas Bernheim & Antonio Rangel, 2003. "Addiction and Cue-Conditioned Cognitive Processes," NajEcon Working Paper Reviews 666156000000000052, www.najecon.org.
  3. 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.
  4. 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.
  5. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, 08.
  6. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  7. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  8. Colin Camerer & George Loewenstein & Drazen Prelec, 2003. "Neuroeconomics: How neuroscience can inform economics," Levine's Bibliography 506439000000000484, UCLA Department of Economics.
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