Bad Investment? Blame Your Brain: Emotion centers kick in when you make financial blunders, study suggests
August 31, 2005
Amanda Gardner / Forbes



WEDNESDAY, Aug. 31 (HealthDay News) -- Scientists may have found a way to quantify the legendary balance of greed and fear that is said to drive investment decisions.

New research appearing in the Sept. 1 issue of Neuron identifies two brain regions that are activated before people make certain types of investment mistakes.

The upshot seems to be that, for better or for worse, emotions play a larger role in financial decisions than is currently recognized.

"These areas of the brain are fairly deep and not associated with math and taxes. They're more associated with emotions or how people feel before they're about to do something," said senior author Brian Knutson, an assistant professor of psychology and neuroscience at Stanford University. "Anticipatory emotions may have some role in decision-making and even financial decision-making."

Knutson conducted the study in conjunction with Stanford doctoral candidate Camelia Kuhnen, whose specialty is finance.

"This research suggests that we're understanding different parts of the brain in relation to decision-making and emotions," added Paul Sanberg, director of the Center of Excellence for Aging and Brain Repair at the University of South Florida College of Medicine in Tampa. He said there's been a trend towards this type of research looking into the neurological roots of human behavior.

Anticipatory emotions are only rarely included in economists' calculations of how people make decisions, Knutson said.

And though the murky area of human feelings is starting to factor into some economic models, economists still lack a way of understanding how emotions might influence choice.

The current study revolved around two basic questions: How people make decisions, especially in financial situations, and whether brain activation is used to predict what decisions they might make, especially when it comes to risky decisions.

Study participants, all of whom were Stanford Ph.D.s, were asked to pick between two stocks and a bond several times over. Just like the stock market, the stakes were real dollars.

Before the transactions began, the researchers randomly designated one stock a "good" one (more likely to make money) and one a "bad" stock (more likely to lose money). The bond paid $1 no matter what.

The participants did not know which stock was good and which was bad, but they could learn which was which by watching the market.

"That's how we figured out if they were behaving rationally or not," Knutson said. "Did they pick according to all the information they had previously?"

Participants' brain activity was scanned with real-time functional MRI as they made the decisions and then learned the outcomes of the decisions.

The volunteers tended to make two types of mistakes: selecting a stock when the bond would have been better or going for a bond when a stock would have been wiser.

Before participants made "risk-seeking" mistakes (such as investing in a stock with a "bad" history), an area of the brain called the nucleus accumbens (NAcc) was activated.

On the other hand, before participants made "risk-averse" mistakes (such as investing in a safe bond when a "good" stock would have been better), an area of the brain called the anterior insula was activated.

"That seems to push people in the direction of avoiding risk if activated too much," Knutson said.

The NAcc is an area that's rich in dopamine and is involved in drug-seeking and other risky behaviors, Sanberg said.

On average, the participants in the study made rational choices 75 percent of the time and made mistakes 25 percent of the time, Knutson said. And the brain areas lit up even when rational choices were being made, just not as much.

These findings may also explain why casinos employ "reward cues" such as free drinks and surprise gifts as anticipation of other rewards that may activate the NAcc and lead to changes in behavior, Knutson added. Insurance companies might employ the opposite strategy, using strategies that would activate the anterior insula, he said.

The bigger message may be a common-sense one: Whenever you're facing a big decision, step back a moment and think it over.

"This is evidence suggesting a mechanism that might help you see things differently," Knutson said. "The lesson is that emotions may have an influence on decision-making."

The information, he added, could be used to improve models of how people make decisions, Knutson said.

And to understand more extreme behaviors.

"The next step is what happens in people that have some kind of alteration or damage to that part of the brain," Sanberg said. "Does that explain why some people are addicted to the stock market and make the wrong choices all the time?"

(source: Forbes, August 31, 2005;