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Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility

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  • CARY FRYDMAN
  • NICHOLAS BARBERIS
  • COLIN CAMERER
  • PETER BOSSAERTS
  • ANTONIO RANGEL

Abstract

type="main"> We conduct a study in which subjects trade stocks in an experimental market while we measure their brain activity using functional magnetic resonance imaging. All of the subjects trade in a suboptimal way. We use the neural data to test a “realization utility” explanation for their behavior. We find that activity in two areas of the brain that are important for economic decision-making exhibit activity consistent with the predictions of realization utility. These results provide support for the realization utility model. More generally, they demonstrate that neural data can be helpful in testing models of investor behavior.

Suggested Citation

  • Cary Frydman & Nicholas Barberis & Colin Camerer & Peter Bossaerts & Antonio Rangel, 2014. "Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility," Journal of Finance, American Finance Association, vol. 69(2), pages 907-946, April.
  • Handle: RePEc:bla:jfinan:v:69:y:2014:i:2:p:907-946
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    File URL: http://hdl.handle.net/10.1111/jofi.12126
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