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The Neural Basis of Financial Risk Taking

Author

Listed:
  • Camelia Kuhnen

    (Stanford Graduate School of Business)

  • Brian Knutson

    (Stanford University Department of Psychology)

Abstract

Investors systematically deviate from rationality when making financial decisions, yet the mechanisms responsible for these deviations have not been identified. Using event-related fMRI, we examined whether anticipatory neural activity would predict optimal and suboptimal choices in a financial decision-making task. We characterized two types of deviations from the optimal investment strategy of a rational risk- neutral agent as risk-seeking mistakes and risk-aversion mistakes. Nucleus accumbens activation preceded risky choices as well as risk- seeking mistakes, while anterior insula activation preceded riskless choices as well as risk-aversion mistakes. These findings suggest that distinct neural circuits linked to anticipatory affect promote different types of financial choices, and indicate that excessive activation of these circuits may lead to investing mistakes. Thus, consideration of anticipatory neural mechanisms may add predictive power to the rational actor model of economic decision-making.

Suggested Citation

  • Camelia Kuhnen & Brian Knutson, 2005. "The Neural Basis of Financial Risk Taking," Experimental 0509001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpex:0509001
    Note: Type of Document - pdf; pages: 46. Published in Neuron, Vol. 47, 763-770, September 1, 2005.
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/exp/papers/0509/0509001.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    neuroeconomics; neurofinance; brain; investing; emotions; affect;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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