Rommil Santiago: eCommerce, Marketing & Management

Neuroscience and Finance

What’s the weather like tomorrow?

As a people, we generally like to figure out how something works so that we can affect and benefit from it in the future. To understand this notion, one only has to look as far as the local news broadcast to see that we all want to know is whether we have to pack an umbrella tomorrow. Of course this is not to say that our interests in the future solely reside in the realm of meteorology. Let’s face it. For the most part we are all interested in money at some level. So it should come as no surprise that experts have been trying to model economies and how financial decisions are made for decades. But while some things can be modelled faithfully through expected-value analysis, there always seems to remain a difference between what these models predict and reality.

No matter its size, an economy remains consistent in that it represents the aggregate of all the financial decisions made by the players within it. However, rather inconsistently, when presented with the exact same financial options, these players will, depending on their mood, choose differently from trial to trial. For instance, depending on whether a player has recently suffered a large loss or a meaningful gain will affect whether he selects a riskier investment or behaves in a more risk-averse manner in the future. As it turns out, there is a good chance that this gap can be spanned with neuroscience.

Risky Business

It has been found that the nucleus accumbens (NAcc) becomes more active in anticipation of a gain and prior to risky decisions while the insula becomes more active during the anticipation of a loss and prior to riskless decisions. Related to this, two steroids have been associated with one’s chances of achieving victory. Testosterone has been tied to encouraging what is termed as the “winner effect”; a scenario in which testosterone helps increase a subject’s confidence, which in turn aids his performance, which in turn increases his chances of victory. And if victory is achieved, the subject’s testosterone levels increase even further, creating a feedback loop where he will be more predisposed to taking on increasingly riskier decisions to continue achieving more victories. Conversely, cortisol production has been associated with what could be considered the opposite of confidence: uncertainty and the expectation of a threat. It’s doubtful that cortisol will be featured on a Wheaties box any time in the near future.

Putting the mechanics of execution and budgetary constraints aside, it could be assumed that if the activity level of either the NAcc or the insula of a subject could be determined, that an offer could be framed in such away to be so appealing that, upon accepting the offer, a feeling of significant gain could be achieved. Continuing with this example, this feeling of victory may prime the subject to be more open to further offers regardless of their riskiness. And even further, if the NAcc or the insula were to be stimulated for a prolonged amount of time, it might be even possible to undermine the subject’s cognitive ability altogether. A marketer’s dream, I dare say.

Casinos, perhaps without formal knowledge of neuro-science, are a prime example of exploiting these financial decision levers. They often offer drinks and other incentives to visitors. It could be said that by doing this they are priming people’s NAccs, encouraging them to take risky decisions, such as gambling.  By winning a game here or there, a visitor’s testosterone could also be tipping the tables towards more gambling through the winner’s effect. It makes you wonder what other businesses are also using this knowledge of the brain towards achieving financial gain. But despite the many possibilities of how this information could be leveraged, the more important question is where do we draw the line?

From answers comes more questions

Today’s North American society is more indebted than previous generations, a fact that could lead to financial hardships for many in the future. Should financial institutions, or even the government, play a principle role in reversing this trend? Should more weight be placed on people’s financial well-being in the future versus the present? And if so, by how much? Is it better to have a comfortable retirement at the expense of a delighted present? And if so, how would one craft a message to convince people of this? By using neuroscience, are we heading down a slippery slope? Or are naysayers simply making mountains out of molehills.

Only a few months ago, at the beginning of the current economic downturn, many switched from being financially aggressive to being risk-averse as they cut spending and chose more blue-chip options. Should these people be coerced using reward stimulus to undertake more risky behaviour to help stimulate the economy? What would people say when they got wind that they were being swayed? The game of financial decision influence can quickly become one about playing with fire quite quickly.

Changing the game is appealing but we have to understand the players first

Undoubtedly, with time, the mechanics of how people make financial decisions will be unravelled, just as the human genome was. Indeed with time, the triggers of risky behaviour and risk-averse behaviour will be mapped out and a myriad of models will be validated. But knowing the triggers are just part of the journey. It must be considered that any actions that increase steroid production in one culture will differ in another as what one culture considers risky could be risk-averse for another. Furthermore, moral questions quickly arise the further we delve into the mind. As with the human genome, knowing how to eliminate undesirable traits or even promote desirable ones doesn’t mean that we should use this knowledge in every case.

However this story unfolds, in the end, the future of neuro-finance remains an interesting one; one that not only promises a better understanding of what drives financial decision-making , but upon identifying all of these drivers, one that will mark the official end of “the easy part” for neuro-finance.

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