Neurofinance – fMRI for stock trading and investing

While I believe that it is a narrow view of how the human being work, the field of Neurofinance uses fMRI (functional Magnetic Resonance Imaging) technology to map our decision process related to investing and stock trading. Neurofinance is based on the study of two brain systems , reward approach (pleasure seeking) and the loss avoidance (pain avoidance) systems.

The brain reward system or circuit is located on one of the five major dopamine pathways, dopamine is considered the pleasure chemical for the brain. The expectation of reward or loss is an indication for future behavior of the investors or traders. Expectation of greater gain activates the brain reward system , in certain cases, it was demonstrates that when traders made their decision when they are deeply emotionally aroused (brain reward system activated and stimulated), such as during the expectation of exceptional gain, this can lead to overconfidence which can lead to overtrading that will result in financial loss.

Other factors, have been considered to predict the behavior of investors and traders, it was noted that factor like good or bad weather can have an impact on traders on a mass level, which can lead to poor trading day. Lunar phases has been studied as having an impact on traders and investors behaviors.

Bottom line, an investor able to detach himself from affective or emotional factor should do better providing, he has and follow a rational approach to trading or investing. In fact according to the book ‘The New Market Wizards’ by Jack D. Schwager , the best traders are those with a system and the will to stick to their system no matter what, thus eliminating emotional factor of the equation, if you have a system that can give you a return of say 15 %, you will have this return only if you stick to your system the lust on opportunity to make extra-gain on some special operation may activate your reward system to a point that can blind your judgement due to the strong pleasure you can experience at the idea to make extra-money, but, it is all irrational, there is no objective reality or proof that the special operation will be a success even if you have a strong belief that the operation will succeed (Reward system blindness)

Technorati Tags: Neurofinance, fMRI, brain systems, reward approach, loss avoidance, dopamine, investors, traders, overconfidence, overtrading, financial loss, trading day

This entry was posted on Wednesday, February 22nd, 2006 at 2:26 pm and is filed under Mind expansion technologies. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.