EC4024 Lecture 19: Neurofinance

The penultimate lecture takes students right up to the cutting edge of behavioural finance: neurofinance.

Neurofinance is a fusion of behavioural economics and neuroeconomics.

I know that's not too helpful yet. Behavioural economics in its modern incarnation looks at persistent deviations from the basic description of the hyper rational homo economicus. Proponents of the theory argue that these deviations aren't deviations at all: they are, in fact, features of human behaviour we'd like to take as primal to any description of human behaviour. Practitioners use game theory to model how boundedly rational (that is, agents don't know everything, and can't process information they receive quickly enough to make sense of the entire world simultaneously) agents might react given an investment decision, and then test the predictions of the game against people's actual responses. Only instead of looking at revealed behaviours and choices made, neurofinance specialists will look at actual brain responses, and try to figure out what neurological basis there is for such a decision. This area of research is still very much in its infancy, but it is definitely worth a lecture to expose you to the cutting edge of this type of research.

Here's a 3 slide handout (with many thanks to Dr Liam Delaney for the slides).

Readings/Links

Peter Bossaert's Lab at Caltech

Neuroeconomics Studies

Kerstin Preuschoff, Peter Bossaerts, and Steven R. Quartz Neural Differentiation of Expected Reward and Risk in Human Subcortical Structures Neuron 51, 381–390, August 3, 2006

Colin Camerer, George Loewenstein, Drazen Prelec, "Neuroeconomics: How neuroscience can inform economics", Journal of Economic Literature, 2005
Paul J. Zak The Neurobiology of Trust Scientific American, June 2008

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