Strategic Mortgage Default and the Decision to Follow the Herd: A Neurological Explanation

Abstract

This study is the first to examine strategic mortgage default and financial herding on a neurological level. Using fMRI technology, we identify a number of substrates within the brain that provide a neurobiological explanation for why some homeowners exercise their mortgage put option while others do not. We link the left interior parietal lobe to herding in participants who observe the default behavior of a maven (real estate expert). Alarmingly, homeowners only significantly follow the herd when mavens advocate strategic default, not when they recommend against it. In trials where the homeowner is severely underwater, the motor cortex and anterior cingulate cortex – a brain region particularly sensitive to situations where behavior may produce errors – show significantly more activation. Moreover, when faced with loan parameters that entice homeowners to indicate a willingness to strategically default, subjects show significant activation of their left lingual gyrus and motor cortex suggesting a greater level of self-reflection during the decision.

Keywords: neurological finance, forensic finance, fMRI, strategic mortgage default, herding