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Where bonehead investments come from

The ups and downs of the stock market reflect investors' balance between greed and fear, goes an old saying. Until now, though, economists have not had a way to incorporate such emotions into their models of investors' strategies. However, in the September 1, 2005, issue of Neuron, Camelia M. Kuhnen and Brian Knutson of Stanford University report the identification of two key brain regions activated before people make risk-seeking versus risk-aversion investment mistakes.

They said that their findings may help to "ultimately improve the design of economic institutions so as to facilitate optimal investor behavior." They also said they believe their experimental design--which they call the "Behavioral Investment Allocation Strategy"--enables researchers to bring the real-life equivalent of individual investment behavior into the laboratory.

In their experiments, the researchers asked volunteers to make investment decisions among two stocks and a bond by pressing buttons. Before each trial run, the researchers "showed them the money," telling the subjects that they would receive a percentage of the cash that they made by investing or would lose cash from their participation fee if they were not successful. Without telling the subjects, the researchers randomly designated one of the stocks a "bad" stock more likely to lose money or as a "good" stock that was more likely to make money. The bond was a safe but conservative investment.

The researchers then scanned the subjects' brains using functional magnetic resonance imaging (fMRI) as they proceeded through a series of decisions on investing in the pairs of the stocks or with the bond and learned the outcomes of those decisions. The commonly used technique of fMRI utilizes harmless magnetic fields and radio signals to map detailed blood flow in brain regions, which reflects activity.

The researchers' analyses of the subjects' choices and brain activity revealed that an area called
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Contact: Heidi Hardman
hhardman@cell.com
1-617-397-2879
Cell Press
31-Aug-2005


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