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Markowitz in the brain ?

Author

Listed:
  • Kerstin Preuschoff
  • Steven Quartz
  • Peter Bossaerts

Abstract

We review recent brain-scanning (fMRI) evidence that activity in certain sub-cortical structures of the human brain correlate with changes in expected reward, as well as with risk. Risk is measured by variance of payoff, as in Markowitz? theory. The brain structures form part of the dopamine system. This system had been known to regulate learning of expected rewards. New data show that it is also involved in perception, of expected reward, and of risk. The findings suggest that the brain may perform a higherdimensional analysis of risky gambles, as in standard portfolio theory, whereby risk and expected reward are considered separately. That is, the human brain appears to literally record the very inputs that have become a defining part of modern finance theory.

Suggested Citation

  • Kerstin Preuschoff & Steven Quartz & Peter Bossaerts, 2008. "Markowitz in the brain ?," Revue d'économie politique, Dalloz, vol. 118(1), pages 75-95.
    • Handle: RePEc:cai:repdal:redp_181_0075
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    Cited by:

    1. Suleyman Basak & Georgy Chabakauri, 2010. "Dynamic Mean-Variance Asset Allocation," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 2970-3016, August.
    2. Zheng, Jiakun, 2020. "Optimal insurance design under narrow framing," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 596-607.

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