People with certain kinds of brain damage may make better investment decisions. That is the conclusion of a new study offering some compelling...
People with certain kinds of brain damage may make better investment decisions.
That is the conclusion of a new study offering some compelling evidence that mixing emotion with investing can lead to bad outcomes.
By linking brain science to investment behavior, researchers concluded that people with an impaired ability to feel emotions could make better financial decisions than others under certain circumstances.
The research is part of a fast-growing interdisciplinary field called “neuroeconomics,” which explores the role biology plays in economic decision making, by combining insights from cognitive neuroscience, psychology and economics.
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The study, published last month in the journal Psychological Science, was conducted by researchers from Carnegie Mellon University, the Stanford Graduate School of Business and the University of Iowa.
The 15 brain-damaged participants who were the focus of the study had normal IQs, and the areas of their brains responsible for logic and cognitive reasoning were intact.
But they had lesions in the region of the brain that controls emotions, which inhibited their ability to experience basic feelings such as fear or anxiety.
The lesions had a range of causes, including stroke and disease, but they impaired the participants’ emotional functioning in a similar manner.
The study suggests the participants’ lack of emotional responsiveness actually gave them an advantage when they played a simple investment game.
Players were more willing to take gambles that had high payoffs because they lacked fear.
Those with undamaged brain wiring, however, were more cautious and reactive during the game, and wound up with less money at the end.
Some neuroscientists believe good investors may be exceptionally skilled at suppressing emotional reactions.
Wall Street executives already are paying attention to the findings, since it offers insight into what motivates investors.
“This branch of inquiry and economic investigation is really fortifying and buttressing our understanding of investor behavior,” says David Darst, chief investment strategist in the Individual Investor Group at Morgan Stanley.
Using sophisticated brain-imaging technology such as magnetic resonance imaging (MRI) tests and other tools, neuroeconomists peek inside to see which regions are activated in behaviors such as evaluating risks and rewards, making choices and cooperating with other people.
Neuroeconomics researchers also tap into brain activity by measuring brain chemicals and exploring how damage to specific brain regions affects economic decision making.
The 41 participants in the study included people with and without brain damage, including a control group with brain damage that didn’t affect their emotional processing.
Players received $20 and played a simple gambling game that involved 20 rounds of coin tosses.
If they won a coin toss, they earned $2.50. If they lost the toss, they had to give up a dollar.
They could choose not to play in any given round, in which case they kept their dollar.
Logic indicates that the best strategy was to take the gamble in every round of the game, since the return on a win was much higher than the potential loss, and the risk in each round was 50-50.
The players with emotion-related brain damage took a more logical strategy, investing in 84 percent of rounds, while the nonbrain-damaged players invested in just 58 percent of the rounds.
Emotionally impaired participants outperformed the nonbrain-damaged participants, winding up with an average of $25.70 versus $22.80 at the end of the game.
The researchers believe fear had a lot to do with the poor performance of nonbrain-damaged participants.
“If you just observe these people, they know the right thing to do is invest in every single round,” says Baba Shiv, an associate professor of marketing at the Stanford business school and a co-author of the study.
“But when they actually get into the game, they start reacting to the outcomes of the previous rounds.”
Yet emotions may play a useful role in financial decision making.
While the brain-damaged players did well in the specific game in the study, they didn’t perform well when it came to making financial decisions in the real world.
Three of four of the brain-damaged players had experienced personal bankruptcy.
Their inability to experience fear led to risk-seeking behavior, and their lack of emotional judgment sometimes led them to get tangled up with people who took advantage of them.
Their life experience suggests emotions can play an important role in protecting our interests, even if they sometimes interfere with rational decision making.