When The Brain Goes To Wall Street

As a student at a liberal arts institution it is easy to find yourself wondering how one field of academia may overlap with others. One such convergence that has become of particular interest to me is the connection between psychology and economics. Economists have recently become aware that taking basic principles of human psychology into account can refine predictions regarding human behavior in the marketplace. While research that breeches the divide between these two fields often takes place in social and personality psychology, neuroscience research has also been linked to the understanding of economic practices.

Much of economic theory is based on the assumption that rational behavior creates a perfect market, yet any psychologist can tell you- humans aren’t always rational. Any single decision requires multiple parts of the brain, and any imbalance can change the conclusions we draw. When investigating the relationship between the brain and rational economic choice, I found an article that particularly piqued my interest. It investigated risk taking in the economic market and its relation to neural connections in the brain. Kuhnen and Knutson (2005) set out to investigate the neural causes for deviations from optimal (and rational) financial decision-making. They based their study on the theory that different states of arousal prompt different risk taking behaviors. Specifically, positive arousal (excitement) predicts risk-taking behavior and negative arousal (anxiety) predicts risk avoidance (Paulus et al., 2003). The goal of Kuhan and Knuston’s (2005) research was to ascertain whether there were specific areas of the brain that were activated prior to risky or riskless decisions.

Kuhan and Knuston (2005) predicted that the nucleus accumbens would be associated with positive arousal and therefore would predict greater risk-taking behavior. Though less evidence exists for the areas of the brain responsible for risk avoidance, Kuhan and Knuston identified the anterior insula as a potentially critical player in negative arousal. Using an fMRI during an economic decision-making task, Kuhan and Knuston were able to find supporting evidence for their hypothesis. They found that heightened activity in the nucleus accumbens preceded riskier decisions, while heightened activity in the anterior insula predicted risk avoidance.

While psychology is an interesting area of study in and of itself, the study of human behavior can be applied to so many other fields. Economics in particular relies on a consistent and predictable trend of human behavior. Understanding what role different parts of the brain play in economic decisions may illuminate when people are likely to be rational, favoring the principles of the free market, and when they are likely to be irrational, causing unexpected changes to market equilibrium.

 

 

Works Cited

Kuhnen, C. M., & Knutson, B. (2005). The neural basis of financial risk taking. Neuron47(5),    763-770.

Paulus, M. P., Rogalsky, C., Simmons, A., Feinstein, J. S., & Stein, M. B. (2003). Increased         activation in the right insula during risk-taking decision making is related to harm        avoidance and neuroticism. Neuroimage19(4), 1439-1448.

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