Behavioural finance -NeuroEconomics and Investor Behaviors

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This slide is about investor behaviors from neuroeconomics perspective. This has been cited from Michael Pompian, the autor of "Behavioral Finance and Wealth Management"/.

Economy & Finance

Neuroeconomics:
The Next Frontier for Explaining
Investor Behavior
Galandar Mammadli

Experimental
economics
Neuorscience
• fMRI
• TCS
• Electrophysiology
Psychology
• Eye tracking
• Psychophysiology

Chemical that produced in the body
Related with Pleasure system
Risk Taking behavior
To be aware of dopamine

• Synthesized in central nervous and digestive
tract
• A reduction of serotonin in the body is often
linked anxiety, depression, impulsiveness,
and irritability.
• Loss Aversion
• Selling too early

• Located in the brain`s medical temporal
lobe.
• Plays a key role in primary emotions
such as fear and pleasure
• When market drops, investors panic
because of amygdala.
• Managing fear is hard but important
“buy when pessimism is at its maximum, sell when
optimism is at its maximum.” –John Templeton

• Planning complex cognitive behaviors,
as well as in social behavior and the
expression of personality.
• Store memories, interfere from
particular data
• Cognitive errors, proper data is not
sufficient, a lack of information
• Education and keeping informed

• Nucleus Accumbens: a collection of neurons
located where the head of the caudate and the
anterior portion of the putamen meet just lateral
to the septum pellucidum (basically, it is located
behind your eyes). This area of the brain plays an
important role in reward, pleasure, and addictive
behaviors.
• The anterior cingulate, the frontal part of the
cingulate cortex, plays a role in a wide variety of
autonomic functions, such as regulating heart
rate and blood pressure, and is vital to cognitive
functions, such as reward anticipation and
decision making.
• Together, the nucleus accumbens and anterior
cingulate help people to recognize patterns and
choose between alternatives.

• The most obvious implication for investors is that because the brain is
searching for patterns, it may convince the cerebral cortex (the
network operations center) that a pattern exists when, in fact, one
does not exist.
• When the brain sees a pattern—“This company has surpassed its
earnings forecasts three quarters in a row!”—it often extrapolates
and assumes that this pattern will continue into the future.
• Follow the trends that are rationally

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