Sep

19

 Hot off the press from the journal Neuron is "In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles." Despite the extremely small sample size in this research, my wife will fervently agree with the conclusion that "abilities that are normally beneficial in social settings can result in unproductive behavior in financial markets."

The article is suggestive that medication and electroconvulsive therapy may improve one's P&L…

Summary:

The ability to infer intentions of other agents, called theory of mind (ToM), confers strong advantages for individuals in social situations. Here, we show that ToM can also be maladaptive when people interact with complex modern institutions like financial markets. We tested participants who were investing in an experimental bubble market, a situation in which the price of an asset is much higher than its underlying fundamental value. We describe a mechanism by which social signals computed in the dorsomedial prefrontal cortex affect value computations in ventromedial prefrontal cortex, thereby increasing an individual's propensity to 'ride' financial bubbles and lose money. These regions compute a financial metric that signals variations in order flow intensity, prompting inference about other traders' intentions. Our results suggest that incorporating inferences about the intentions of others when making value judgments in a complex financial market could lead to the formation of market bubbles.


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