Your Brain on Neuroeconomics

******One blogger/trader/educator who does a wonderful job of sharing research on elite performance and how it relates to trading is David Blair, The Crosshairs Trader. Below is his latest Sunday Links post for the SMB Trading Community. We hope you enjoy!****** — Editor’s note

Neuroeconomics is the study of human decision-making. Combining several fields of study from behavioral economics to cognitive and social psychology, neuroeconomics seeks to understand why we make the decisions we make and how best to avoid irrational ones. Neuroeconomic discoveries are of particular interest to investors and traders, who, under conditions of extreme uncertainty, must make potential money-making decisions on a day-to-day basis. Understanding why we do what we do can provide valuable information for important decisions. Neuroeconomics seeks to provide that information.

The following is a list of sources to get you started down the road to better decision-making. 

Neuroeconomics has its origins in two places: in events following the neoclassical economic revolution of the 1930s, and in the birth of cognitive neuroscience during the 1990s. (History of Neuroeconomics)

“Whereas psychologists tend to view humans as fallible and sometime even self-destructive, economists tend to view people as efficient maximizers of self-interest who make mistakes only when imperfectly informed about the consequences of their actions.” (Neuroscience News)

“The founding principles of neuroeconomics are that the behavioral deviations observed when financial decisions are made have a relevant explanation, and that this explanation involves brain mechanisms.” (ParisTech Review)

“If financial decisions and capital markets are driven by rational thinking, then why does the manner in which the crisis developed seem so irrational?” (NCBI)

“The hypothesis guiding the study was that the higher a trader’s testosterone levels were at the beginning of the day, the more money he would make.” (Brain Facts)

“What does a stock trader have in common with a cocaine addict anticipating a fix?” (Huffington Post)

“Kahneman and Tversky found that people suffer a higher degree of pain from losing money than they feel pleasure from making money. So they tend to hold on to losing stocks rather than sell and lock in a loss.” (Bloomberg)

“Findings about the role of optimism in risk-taking, the effects of emotion on decision weights, the role of fear in predictions of harm and the role of liking and disliking in factual predictions all indicate that the traditional separation between belief and preference in analyses of decision-making is psychologically unrealistic.” (Stanford Paper)

Books on neuroeconomics:

Neuroeconomics and the Brain edited by Paul Glimcher et al.
Predictably Irrational by Dan Ariely
Your Money and Your Brain by Jason Zweig
You Are Not So Smart by David McRaney
Investing and The Irrational Mind by Robert Koppel

Now, let’s go and make better decisions.

David Blair


Related blog posts:
Enhancing Performance With Bias Awareness
Ask the Trading Doc: How Do I Take on More Risk?

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One Comment on “Your Brain on Neuroeconomics”

  1. I’ve been a member of the Society for Neuroeconomics (it’s based in Zurich) and try to keep up with the latest research in this area.

    Although that’s an interesting reading list David posted, I would say that most those of those books are not going to help the average trader at all. Although those books are intellectually stimulating (I have all of them but one) they all have the same message…..never trust yourself.

    Once you have a trading method you believe has an edge, you need to be able to trust yourself. For the most part, these books tell the reader to ignore intuition because they tell the reader that ‘System 1 thinking’ (from Daniel Kahneman’s, “Thinking, Fast and Slow) is irrational, lazy, emotional, etc.

    Intuition is in many ways associated with our unconscious process, and that is what the authors of those books essentially tell us. But those authors also say that the unconscious, personal beliefs and emotions are the enemy. But in my experience working with some of the top traders in the world what I have learned is that learning to develop self-awareness on many dimensions using (e.g. using emotions a s a source of information, instead of ignoring them) and the ability to trust yourself requires that you be open to your unconscious and yur emotions and learn how to use this data as a source of information, not as the enemy. Obviously, that takes a lot of practice and commitment and does not come easily overnight. Many traders think that they are being intuitive when actually they are simply succumbing to an impulse or fantasy.

    As a trading performance coach all of the very best traders I know all use their intuition in one way or another. But there are certainly problems with intuition, one of them being how do you recognize your intuition from impulse or fantasy – and the writers in those books in my opinion don’t do a good enough job addressing that issue. Another problem with intuition is that it is often elusive and difficult to measure, therefore, people who conduct research will generally write it off.

    I just returned from where I spoke on intuition where I received a lot of very positive feedback for my presentation.


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