Brain Scans Provide Stock Market Clues

Wall Street analysts scour earnings reports and graphs to help predict the roller-coaster nature of the stock market.

A new field of research, called neural economics, suggests that studying the brain scans of people who play the stock market may provide just as much insight. A process called valuation, detailed in a recent issue of the neuroscience journal Neuron, helps explain buying and selling behavior on the stock market.

“Valuation is an ongoing function of every nervous system and allows humans to prioritize one relative behavior over another,” said Read Montague, Ph.D., professor of neuroscience and director of the Center for Theoretical Neuroscience and the Human Neuroimaging Lab at Baylor College of Medicine. “Some of the neural systems involved in valuation are also hijacked by drugs of abuse and certain forms of mental illness.”

To survive, humans and other complex organisms developed a system to make rapid decisions, for example, whether to run from a predator or to continue eating last night’s kill. The brain converts the vast amount of information it receives from the environment into a common currency. For each decision, the brain must weigh the predictability of future reward or punishment, much like a person tries to predict whether a stock will go up or down.

Montague and his research team have developed a mathematical equation based on this concept and are putting it to the test with a series of experiments using functional magnetic resonance imaging, or FMRI, machines. FMRI records changes in blood flow and allows researchers to see which part of the brain is active when exposed to stimuli. Research participants are hooked up to FMRI machines while undergoing decision-making experiments and while receiving some sort of pleasurable reward, such as playing a computer game.

The results show that the orbitofrontal cortex and striatum areas of the brain are most involved with valuation, and reveal a connection between the way the brain values events in the world and a common method for pricing stock options called the Black-Scholes.

“I strongly suspect that these new findings provide real biological insight into why the Black-Scholes approach has any efficacy in a real market,” said Montague. “Although the language sounds very economic, these findings have profound implications for a new view of the impaired social interactions associated with drug addiction and mental illness.”

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