Behavioral Finance

CHAPTER 20

Neuroeconomics

In Part Three, we reviewed behavioral biases that seem inconsistent with the rationality assumptions of traditional economics. These biases have been documented by psychologists and economists in a large number of studies. What are the sources of these biases? Could we overcome our own biases by learning that we have them and resolving to rid ourselves of the biases that we find harmful to our own interests? Or, more ominously, are these biases innate, possibly genetic? Are these biases attributable to our evolutionary history? Could these biases be culture-bound rather than genetic? The field of neuroeconomics studies the extent to which there is a neurological basis for our emotions and decisions. Research in neuroeconomics began to flourish after the turn of the twenty-first century and was stimulated in part by interest in behavioral finance.

CAPUCHIN MONKEYS

The results of research experiments with capuchin monkeys1 performed at Yale University seemed to suggest that these monkeys displayed some of the same behavioral tendencies that Kahneman, Tversky, and others had uncovered in humans. The monkeys were confronted with two sellers. One seller would show a single apple slice, but if the monkey were to purchase from that seller, the monkey would receive either one or two apple slices with equal probability. A second seller would show two apple slices but would provide the monkey with the same outcome upon purchase as the first seller—the monkey would ...