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March 13, 2014

Economic bubbles make traders’ brain switch mode

Brain activity recorded by MRI

A new study by researchers from the Brain Science Institute and other institutions in Japan identified a neural network that is activated in the brain of traders during uncertain and unstable market conditions typical of economic bubbles, which explains why they tend to make overly positive predictions for the future, ignoring the current economic reality.

The researchers analyzed the brain activity of subjects who were asked to trade stock on a virtual stock exchange while inside a magnetic resonance imaging (MRI) scanner.

The imaging results reveal that different brain circuits corresponding to different trade behaviors are activated under different market conditions.

When the subjects were trading under a stable market condition, their brain mode recruited a network for decision-making involving the ventrolateral and dorsolateral prefrontal cortices, together with the inferior parietal lobule.

When the scenario emulated an economic bubble situation, the network linking the dorsolateral prefrontal cortex and the inferior parietal lobule became predominant. These regions of the brain are known to be involved in goal-oriented decision-making and perception of the future.

“This brain mechanism might lead to a loss of control caused by wishful thinking, and to microeconomic bubbles that expand, on the macroscopic scale, towards burst,” conclude the authors.

The study is published in Neuroscience http://dx.doi.org/10.1016/j.neuroscience.2014.01.029