Neuroeconomics
I read about an emerging field today called "neuroeconomics." This means doing fMRIs on people as they make decisions involving money, greed, and risk. (fMRI = functional MRI. It allows real-time viewing of blood flows in the brain. It could veyr quietly revolutionize both medicine and psychology).
Anyway, they found that people use their "rational" centers (like the pre-frontal cortex) to think about long-term money matters, like buying mutual funds and making savings plans for retirement. But when making decisions in the here-and-now-- like whether to have that third helping of coconut-cream pie-- it was pure animal brain. The rational centers were overwhelmed. This is why people make stupid buying decisions on the spur of the moment.
Guess who makes the most spur-of-the-moment buying decisions? Traders on the floors of the world's major stock exchanges. Economics is not rational. People are not rational. It's only a matter of time before standard economic theory, based on the "rational actor", is jettisoned in favor of more psychologically sound (and mathematically messy) models.
I noticed a neat personal connection too. I just saw my financial adviser the other day-- it's a once-a-year thing. Anyway, at some point I had to take a "risk profile" test, where I answered a bunch of questions about what I would do in various hypothetical situations.
They were all in-the-moment situations, like "would you rather place a bet that has a 50% chance of getting you $100, or one with a 25% chance of getting you $200 and a 25% chance of losing you $25." Or whatever.
Anyway, on that test, I came out "moderately risky." This means that my adviser is constantly offering me investments based on a "Moderate" portfolio. Such portfolios have a mix of stocks and bonds. But this makes no sense for me as an investor. I am young enough that my portfolio should basically be all stocks.
Everytime I tell her this, she says, "Yeah, but you came out Moderate on the test...."
Well, of course I did. That's how I am in short-term situations. But for long-term investments, I can use my rational brain and say, "In the long term, I need to have as much as risk as possible in my investments in order to gain the highest possible returns. I am young enough that this makes sense."
So I can rationally choose to be much less rational than I would be in the short run, even though it is the animal brain working in the short run.
Neuroeconomics might just have something to it...
Anyway, they found that people use their "rational" centers (like the pre-frontal cortex) to think about long-term money matters, like buying mutual funds and making savings plans for retirement. But when making decisions in the here-and-now-- like whether to have that third helping of coconut-cream pie-- it was pure animal brain. The rational centers were overwhelmed. This is why people make stupid buying decisions on the spur of the moment.
Guess who makes the most spur-of-the-moment buying decisions? Traders on the floors of the world's major stock exchanges. Economics is not rational. People are not rational. It's only a matter of time before standard economic theory, based on the "rational actor", is jettisoned in favor of more psychologically sound (and mathematically messy) models.
I noticed a neat personal connection too. I just saw my financial adviser the other day-- it's a once-a-year thing. Anyway, at some point I had to take a "risk profile" test, where I answered a bunch of questions about what I would do in various hypothetical situations.
They were all in-the-moment situations, like "would you rather place a bet that has a 50% chance of getting you $100, or one with a 25% chance of getting you $200 and a 25% chance of losing you $25." Or whatever.
Anyway, on that test, I came out "moderately risky." This means that my adviser is constantly offering me investments based on a "Moderate" portfolio. Such portfolios have a mix of stocks and bonds. But this makes no sense for me as an investor. I am young enough that my portfolio should basically be all stocks.
Everytime I tell her this, she says, "Yeah, but you came out Moderate on the test...."
Well, of course I did. That's how I am in short-term situations. But for long-term investments, I can use my rational brain and say, "In the long term, I need to have as much as risk as possible in my investments in order to gain the highest possible returns. I am young enough that this makes sense."
So I can rationally choose to be much less rational than I would be in the short run, even though it is the animal brain working in the short run.
Neuroeconomics might just have something to it...
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