Contribution of Neuroscience to Financial Decision-Making

The apparent limitations of rational decision-making have become increasingly important phenomena that are unexplained by traditional economic models. Initial research found that these anomalies were not just random deviations from normative models, but actually, systematic physiologically driven psychological processes. Behavioral Finance and Economics that emerged as biopsychological fields began to explain how people actually use information when making financial decisions. In the past, behavioral economic research has relied on extrapolation. Choice could only be inferred from observed outcomes through behavior. Recently, neuroscience, as powered by in-vivo brain imaging and our understanding of brain biology, has allowed scientists to more directly examine the internal landscape of decision-making. A literature review of applied clinical neuroscience and neuroeconomics yields a new perspective on decision-making – one that is driven by objective data. These data are generated by means of newly developed tools. However, these tools come with well-defined strengths and weaknesses. Understanding the technological constraints is critical to appropriate data interpretation and future model building. This review addresses two different and independent brain operations: the reflexive automatic process and the reflective deliberate process. The meso-limbic and meso-cortical systems, which underlie each operation, are essential to understanding decision-making in the light of the emotional, learning, memory, and executive processes involved in decision-making. A significant amount of work has been devoted to studies of the neurotransmitter system involving Dopamine (DA). Dopamine seems to emerge as a key player in decision-making due to the association it holds with reward, attention, motivation, and error assessment brain processes. In addition, DA, in concert with other neurotransmitters and neuro-modulators, influences affective states that play a significant role in regulating physiological and psychological homeostasis. An individual’s intrinsic processes that are genetically influenced and modulated to regulate homeostasis will consequently impact acute sensitivities as related to rewards and punishments. Thus, the threshold and tolerance for reward and punishment are strongly associated with the decision-making. In line with the growing body of neuroeconomic research, this review presents the neuroscientific underpinnings of information processing and decision-making. The conclusions are not about the rational decision model being wrong, but rather about its potential limitations in light of new biologically driven data.