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The Neuroscience of Financial Bubbles

 

Explanations > Brain stuff > The Neuroscience of Financial Bubbles

Description | Discussion | See also

 

Description

Read Montague, of Baylor College of Medicine, did an experiment in letting subjects 'bet' on a stock market pattern (based on real financial bubbles) whilst monitoring their brain activity.

He found an increased flow dopamine in the early stages of the bubble, reflecting the desire for profit, with continued dopamine flows to the caudate nucleus which increased excitement as the market built up.

However, he then noticed a reduced rate of neuron firing as the market kept rising, culminating in a cessation just before the market burst. Yet despite this internal warning, the subjects behaved just like people in real situation, betting way beyond the point where they should have pulled out.

Discussion

Very interestingly, this indicates that a part of the brain knows when something is wrong and tries to stop foolish investment, yet other parts of the brain counteract this. Even the rational pre-frontal cortex joins in by inventing rational reasons to continue in the game.

This effect was exacerbated further by the presence or information about other people as subjects now tried to make more money than others. Unsurprisingly, perhaps, men are more susceptible to this competitive effect.

See also

Dopamine

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