Investor Behavior: The Psychology of Financial Planning and Investing

CHAPTER 21

Neurofinance

Richard L. Peterson

Managing Director, MarketPsych LLC

INTRODUCTION

Behavioral finance studies describe market price anomalies and individual decision biases. Unfortunately, such descriptions of behavior have not proven amenable to generalization or predictive modeling. Neurofinance research illuminates the fundamental mechanisms that underlie how individual biases, irrational behavior, and collective buying and selling decisions emerge. Using research tools and techniques borrowed from the field of neuroscience, scientists are gaining the necessary insights to build comprehensive economic models of human economic behavior and decision-making.

Just as the field of economics provides a foundation for traditional finance, neuroeconomics research is informative of neurofinance. Neurofinance is not a separate field so much as a set of experimental techniques and tools that practitioners in many other fields adopt to investigate questions of central interest. Neurofinance experimentation is defined by the use of the scientific method to identify drivers and modifiers of choice behavior. Experimental apparatuses including neuroimaging and behavioral monitoring equipment are frequent tools of choice in such research. The use of neuroscientific research tools allows economists to look at biological drivers of decision-making. In particular, many economists are interested in investigating the origins of the nonoptimal decision-making. Issues addressed by neurofinance ...