A Model That Makes Stock Trading Behavior Comprehensible

  • Researchers have built a new model for analyzing stock trading behavior. 
  • It shows that the anterior insular cortex regions of the brain are more active among individuals who do not buy stocks. 

Despite huge profit expectations in long-term, most people do not prefer to invest their hard-earned money in the stock market. Can you guess, Why? One of the most valid reason is fear of losing money.

To explain this on a scientific level, researchers at the University of Bonn recently came up with a model that describes people’s stock buying behavior by combining neuroscientific, physiological, and socioeconomic data in a unique way.

They used fMRI (functional magnetic resonance imaging) to extensively study what goes on within the brain while making financial decisions. They measured brain activation and analyzed the dissimilarities in the estimated mean activation between people who were and weren’t trading stock.

The Experiment

The researchers selected a total of 157 male candidates aged between 29 and 50 years. There were asked to answer some personal financial questions:

  1. Do you have any kind of loan?
  2. Do you invest money in the stock market?
  3. How much risk do you take while investing money?

Investing paradigm and regions of interest | Courtesy of researchers

Researchers conducted a fMRI scan of all participants while they were figuring out: Should I invest in risky stock to double my profit or purchase a safe bond. After they made a decision, researchers showed them stock results, and later they paid the final sum of the experiment. To obtain an accurate statistical evaluation, researchers made participants repeat decisions in 96 trials.

Reference: Nature | doi: 10.1038/s41598-018-29670-6 | University of Bonn

Results

This experiment revealed that one particular region of the brain played a key role while making financial decisions: Anterior Insular Cortex. It’s situated in each hemisphere of the cerebral cortex folded within the lateral sulcus, a deep fissure isolating the temporal lobe from the frontal and parietal lobes.

Image credit: Wikimedia

Both the right and left form of this brain portion were involved in making risky decisions (when participants chose to purchase stocks). The anterior insular behaved like a stop/warning signal against risky choices. However, it was less active in participants who had experience in buying stocks.

There was a small difference between traditional investors and stock traders, when buying stocks resulted in significant profits. The viewpoint towards low- and high-risk choices unveiled a stronger correlation to the actual behavior than the profitable results.

The 2 major parameters responsible for this type of attitudes are risk tolerance and risk optimism. People who make risky decisions have a high-risk tolerance, while people with more risk optimism believe that stock trading could lead to significant profits. Moreover, both these parameters behave as a mediator between the stock buying behavior and anterior insular cortex activity.

Read: Brain Stimulation Can Decrease A Person’s Intention To Commit A Violent Act

Overall, the model demonstrated that the risk tolerance and risk optimism are highly responsible parameters for making stock trading decisions, in addition to typical economic factors like education and income. The research helps us better understand the financial risk-taking behavior, which is crucial for extending our knowledge about individual heterogeneity in financial choices.

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