The Neural Basis of Financial Risk Taking

Neuron, Vol. 47, pp. 763-770, September 1, 2005

46 Pages Posted: 10 Sep 2005

See all articles by Camelia M. Kuhnen

Camelia M. Kuhnen

University of North Carolina Kenan-Flagler Business School & NBER

Brian Knutson

Stanford University - Psychology

Abstract

Investors systematically deviate from rationality when making financial decisions, yet the mechanisms responsible for these deviations have not been identified. Using event-related fMRI, we examined whether anticipatory neural activity would predict optimal and suboptimal choices in a financial decision-making task. We characterized two types of deviations from the optimal investment strategy of a rational risk-neutral agent as risk-seeking mistakes and risk-aversion mistakes. Nucleus accumbens activation preceded risky choices as well as risk-seeking mistakes, while anterior insula activation preceded riskless choices as well as risk-aversion mistakes. These findings suggest that distinct neural circuits linked to anticipatory affect promote different types of financial choices, and indicate that excessive activation of these circuits may lead to investing mistakes. Thus, consideration of anticipatory neural mechanisms may add predictive power to the rational actor model of economic decision-making.

Keywords: Neuroeconomics, neurofinance, brain, investing, emotions, affect

JEL Classification: D81, D83, D84, C91, G11

Suggested Citation

Kuhnen, Camelia M. and Knutson, Brian, The Neural Basis of Financial Risk Taking. Neuron, Vol. 47, pp. 763-770, September 1, 2005. Available at SSRN: https://ssrn.com/abstract=795606

Camelia M. Kuhnen (Contact Author)

University of North Carolina Kenan-Flagler Business School & NBER ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
(919) 9623284 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/kuhnenc/

Brian Knutson

Stanford University - Psychology ( email )

Stanford, CA 94305
United States
650 723 7431 (Phone)
650 725 5699 (Fax)

HOME PAGE: http://psychology.stanford.edu/~knutson

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