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  • Icon for: Teresa Wang

    Teresa Wang

    May 21, 2012 | 05:30 p.m.

    Very interesting research! Traders are taught to be risk averse to mitigate potential losses. Were your subjects informed about the underlying markov scheme while they participating in the study? This is probably described on your poster, but I do not have Flash installed on this device, will be sure to check it out later! Thanks Cary.


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Icon for: Cary Frydman


California Institute of Technology
Years in Grad School: 5

Neurofinance: Testing Theories of Investor Behavior Using Neural Data

We show that measures of neural activity provided by functional magnetic resonance imaging (fMRI) can be used to test between theories of investor behavior that are difficult to distinguish using behavioral data alone. Subjects traded stocks in an experimental market while we measured their brain activity. Behaviorally, we find that, our average subject exhibits a strong disposition effect in his trading, even though it is suboptimal. We then use the neural data to test a specific theory of the disposition effect, the “realization utility” hypothesis, which argues that the effect arises because people derive utility directly from the act of realizing gains and losses. Consistent with this hypothesis, we find that activity in an area of the brain known to encode the value of decisions correlates with the capital gains of potential trades, that the size of these neural signals correlates across subjects with the strength of the behavioral disposition effects, and that activity in an area of the brain known to encode experienced utility exhibits a sharp upward spike in activity at precisely the moment at which a subject issues a command to sell a stock at a gain.