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

See all articles by Cary Frydman

Cary Frydman

University of Southern California - Marshall School of Business

Nicholas Barberis

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

Colin Camerer

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

Peter Bossaerts

University of Melbourne - Department of Finance; University of Cambridge

Antonio Rangel

California Institute of Technology

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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 Barberis, Nicholas and Camerer, Colin F. and Bossaerts, Peter L. 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 California 90089
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Nicholas Barberis

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Yale School of Management ( email )

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Colin F. Camerer

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

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Pasadena, CA 91125
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626-395-4054 (Phone)
626-432-1726 (Fax)

Peter L. Bossaerts

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Antonio Rangel

California Institute of Technology ( email )

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