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Using Neural Data to Test A Theory of Investor Behavior: An Application to Realization Utility

Journal of Finance, Forthcoming

70 Pages Posted: 23 Jul 2011 Last revised: 22 May 2013

Cary Frydman

University of Southern California - Marshall School of Business

Nicholas Barberis

Yale School of Management; National Bureau of Economic Research (NBER)

Colin Camerer

California Institute of Technology - Division of the Humanities and Social Sciences

Peter Bossaerts

Brain, Mind and Markets Laboratory

Antonio Rangel

California Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: July 21, 2011

Abstract

We conduct a study in which subjects trade stocks in an experimental market while we measure their brain activity using functional magnetic resonance imaging. All of the subjects trade in a suboptimal way. We use the neural data to test a “realization utility” explanation for their behavior. We find that activity in two areas of the brain that are important for economic decision-making exhibit activity consistent with the predictions of realization utility. These results provide support for the realization utility model. More generally, they demonstrate that neural data can be helpful in testing models of investor behavior.

Keywords: neuroeconomics, trading, disposition effect, realization utility

JEL Classification: G11

Suggested Citation

Frydman, Cary and Barberis, Nicholas and Camerer, Colin and Bossaerts, Peter and Rangel, Antonio, Using Neural Data to Test A Theory of Investor Behavior: An Application to Realization Utility (July 21, 2011). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1892338 or http://dx.doi.org/10.2139/ssrn.1892338

Cary Frydman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Nicholas Barberis

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-0777 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Colin F. Camerer

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States
626-395-4054 (Phone)
626-432-1726 (Fax)

Peter L. Bossaerts

Brain, Mind and Markets Laboratory ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

HOME PAGE: http://bmmlab.org

Antonio Rangel

California Institute of Technology ( email )

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