Neurofinance: Bridging Psychology, Neurology, and

Investor Behavior

Steven G. Sapra 1
Paul J. Zak 2

December 2008

1
Department of Economics, Claremont Graduate University. Analytic Investors, 555 W. 5th St., 50th Floor,
Los Angeles, CA 90013. All correspondence should be forwarded to steve.sapra@gmail.com
2
Department of Economics and the Center for Neuroeconomic Studies, Claremont Graduate University,
160 E. 10th St., Claremont, CA 91711-6165.

Electronic copy available at: http://ssrn.com/abstract=1323051

 “Yet some whim or other led me, on remarking that the red had come up
consecutively for seven times, to attach myself to that colour. Probably this was mostly due
to self-conceit, for I wanted to astonish the bystanders with the riskiness of my play. Also, I
remember that--oh, strange sensation!--I suddenly, and without any challenge from my own
presumption, became obsessed with a DESIRE to take risks. If the spirit has passed through
a great many sensations, possibly it can no longer be sated with them, but grows more
excited, and demands more sensations, and stronger and stronger ones, until at length it falls
exhausted. Certainly, if the rules of the game had permitted even of my staking fifty
thousand florins at a time, I should have staked them. All of a sudden I heard exclamations
arising that the whole thing was a marvel, since the red was turning up for the fourteenth
time!”

- Fyodor Dostoyevsky, The Gambler, 1867

1. Introduction

The fundamental human dilemma as described by Shermer (2007), lies in the fact

that Homo sapiens evolved over millions of years and adapted certain brain mechanisms

which, while serving us well on the African Savanah, are largely maladaptive for today’s

complex world of trade and finance. Take, for example, our natural tendency for fight or

flight – the largely automatic instinct to either initiate a physical confrontation or run in

the presence of danger. The fight or flight instinct generally lies below our

consciousness. Intensely deliberating the appropriate actions, weighing the costs and

benefits, and logically forming a conclusion with respect to the optimal choice, would no

doubt result in a quick death for our ancestors. Rather non-deliberative, nearly

instantaneous, reaction to such a situation would be required for our survival. We

evolved our autonomic processes through natural selection – such characteristics would

Electronic copy available at: http://ssrn.com/abstract=1323051

have been selected for rather than against through our evolutionary history.

Unfortunately, many of these adaptive traits serve us poorly in navigating the

complexities of our modern day economy.

The model of rational man was largely solidified by the rational expectations

theorists of the 1970’s (see Lucas, 1972). The underlying premise behind rational

expectations is that human beings, on average, are able to properly weight the

probabilities of future outcomes and form a logical conclusion as to the appropriate

decisions to undertake. Regardless of the innate complexity in employing such an

algorithm, rational expectations assumes that economic actors posses the requisite

cognitive capacity to make such calculations. The notion of human beings acting as

Spock-like rationalists, with total disregard for emotion, led to broad conclusions about

everything from the value of externalities (Coase, 1960) to the efficiency of financial

markets (Fama, 1970). The fundamental premise underlying such conclusions, however,

was that human beings behaved in a rational fashion, displaying time consistency, and a

constant level of risk aversion.

The past twenty years, however, have seen the ascendance of, first the school of

behavioral economics, and now the field of neuroeconomics. The behavioralists (see

Thaler, 1991, for example), took a normative viewpoint in their theories of human

behavior. Specifically, unlike the rationalists, who assumed optimal behavior as

predicted by expected utility theory (Neumann, 1944), the behaviorists took no ex-ante

viewpoint on human behavior. Rather, the behaviorists first observed actual behavior and

subsequently drew conclusions as to the appropriate axioms to describe revealed actions

and choices. Daniel Kahneman was awarded the Nobel Prize in economics in 2002 for

3
his contribution to the work Prospect Theory, which developed a series of behavioral

axioms to describe actual behavior observed in experimental settings. 3 The distinction

between these two schools of thought could not be greater: the rationalists presumed that

human behavior followed a particular prescription, namely expected utility maximization,

employed through the lens of rational expectations, while the behavioralists formed

theories of human behavior based on empirical observation.

Growing evidence suggests that human beings generally do not behave

consistently with the predictions made by rational choice models. For example, humans

are known to use heuristic simplification (Simon, 1956) in order to reduce complex

problems to something tractable, are subject to framing effects (Tversky, 1981), and are

subject to overconfidence (Odean, 1998), just to name a few of the known biases in

behavioral psychology. The burgeoning field of neuroeconomics (Camerer, et. al., 2005)

is now bridging the gap between the rationalists and behavioralists, showing which brain

regions are most active in decision making. We are learning that what was once

considered to be irrational is really simply human. Neurology is teaching us that specific

brain structures are responsible for various aspects of human behavior, and that the

interaction between brain regions dictates our actual behavior and decisions.

In 1759, in The Theory of Moral Sentiments, philosopher Adam Smith described

human beings as struggling between the “passions” and the “impartial speculator”.

While Smith lacked today’s technology, his prescience showed what modern-day

psychology and neuroscience is now discovering. Specifically, human decision making

is largely about the struggle between the affect associated with novelty and the cognitive

3
Amos Tversky, who co-authored Propsect Theory died in 1996. The Nobel Prize is not awarded
posthumously.

4
deliberation that human beings possess to override our natural instincts for instant

gratification. Smith’s “passions” characterize the limbic, or “wanting”, system of our

evolutionary older mid-brain region, while the “impartial speculator” describes our

uniquely-human prefrontal brain regions which have the ability to suppress our more

reptilian instincts. It is the interplay between the desires of the wanting system and the

parental override of our prefrontal cortex, that characterizes the richness and diversity of

human behavior – what the rock group R.E.M. termed Life’s Rich Pageant.

The implications of recent findings from psychology and neurology have led to

the development of the field of neuoeconomics. Neuroeconomics is essentially a blend of

the fields of behavioral psychology, neurology, and economics. Neurology has helped to

substantiate many of the empirical findings of behavioral psychologists by determining

the underlying brain mechanisms involved in decision making and behavior. Introducing

the fields of psychology and neurology into the traditionally more staid field of

economics, has aided us in our understanding of actual behavior, particular with respect

to economic decision making. Unlike the rationalists, who presume that humans make

decisions in the absence of emotion, the behavioralists have shown that much of human

decision making is driven by affect - our purely emotional responses to stimuli.

Neuroscience has discovered that a significant portion of human behavior is dictated by

autonomic mechanisms – brain processes which take place largely away from our

consciousness. 4 Economists have exploited these findings to attempt to explain why so

much human behavior defies the predictions made by rational choice models. The result

is the field of neuroeconomics.

4
The terms autonomic and automatic are used interchangeably throughout this paper.

5
 The purpose of this paper is to catalog some of the important findings from the

fields of psychology and neurology, and to show potential implications for economics,

with particular emphasis on financial markets. The blending of these fields is developing

a new sub-field of neureconomics known as neurofinance. Financial markets are a

particularly interesting arena for studying the implications of human behavior. The

notion of market efficiency, whereby the prices of risky assets reflect all publicly

available information is heavily (if not entirely) reliant on the assumption of rationality.

Relaxing the assumption of perfect rationality has wide ranging implications for financial

markets, including the predictability of asset returns, liquidity, bubbles, and crashes.

Several theoretical models have been developed which drop the perfect rationality

assumption, and result in investor behavior more consistent with that observed in

empirical studies (see Scheinkman and Xiong, 2005, for example). While much of the

link between neurological systems, human behavior, and economic decision making is

conjecture at this point, neurology and psychology are providing us with an increasing

quantity of evidence, helping to bridge the gap between market efficiency and market

reality. Understanding the neural mechanisms which explain behavior, will help us (at

least partially) to disentangle in the numerous complexities of modern financial life.

6
 2. Empirical Findings in Neuroeconomics

2.1 A Neural Basis for Decision Making Under Uncertainty

Expected utility theory (Neumann, 1944) plays a vital role in economics, and

particularly financial economics. The expected outcome of a gamble, originally

described by Daniel Bernoulli in 1798, is defined by the probability-weighted outcome

over all possible states of the world. In a continuous probability space, the expected

outcome of a variable is simply the integral over the state space weighted by their

associated probabilities of occurrence. The concept of expected utility in economics

describes a process by which a rational agent makes economic decisions in the presence

of uncertainty, considering not only the expected outcome, but its variance as well.

Because people are assumed to be risk averse, an individual will only assume a risky

gamble if its expected utility exceeds the utility one derives from an alternative riskless

outcome, also known as a certainty equivalent. In other words, people take gambles only

when it makes sense on a risk adjusted basis. Employing the theorem of Jensen (1906),

one can show mathematically that a risk averse agent will always prefer a certain

outcome to an uncertain one. 5 An individual’s willingness to assume risk (which can vary

starkly across subjects) can be measured in the method as described by Arrow (1971).

As with all theories in economics expected utility theory (EUT) relies on a critical

set of assumptions. EUT assumes that an economic agent knows with certainty the

relevant outcomes and their associated probabilities. Additionally, it is assumed that the

subject possesses the intellectual and cognitive capacity to perform the calculation of

5
This assumes that the expected outcome is equal to the certain outcome. Jensen’s inequality states

∫
that u ( x ) dF ( x) ≤ u ( ∫ xdF ( x) ) ∀ F () , where u is a concave (utility) function and F is a non-
degenerate probability distribution.

7
expected utility, weighing the tradeoff between the expected outcome and its variance.

Thus an agent must be able to probability weight the (known) state space as well as

determine whether or not the expected outcome of a gamble is sufficiently high to

warrant the risk one takes in accepting such a gamble.

However, in part due to our limited cognitive processing abilities, the onerous

hurdle that EUT presents, in essence makes EUT an upper bound on human behavior

rather than a prescription for actual behavior. Camerer (2006), in fact, describes the

model of perfectly rational man as “a useful limiting case”, highlighting the extent to

which real behavior deviates from that predicted by EUT. In his work “A Behavioral

Model of Rational Choice”, Herbert Simon (1955) coined the term “satisficing” – a blend

of the words “satisfy” and “suffice” – to describe how the cognitive limitations of human

beings force us to make “good” decisions rather than “optimal” decisions as described by

EUT. The notion of satisficing is seen in the work of Kahneman & Tversky (1979),

whereby it is shown that, in what the authors term the “editing phase” of the evaluation of

a gamble, individuals may discard low probability events and assume certainty for high

probability events in an effort to simplify the evaluation of a problem. Such heuristics

may be justified from a neural perspective as a rational tradeoff between the benefits of

deliberation and the biological costs associated with such deliberation.

In a series of four seminal fMRI studies between 2001 and 2003, Brian Knutson

of Stanford University showed that expected utility can be generally defined in specific

brain regions. Knutson (2001) found that three subcoritcal (below the cortex) regions are

associated with the expectation of a monetary reward, and are active in a magnitude-

proportional manner. Specifically, the three primary brain regions were found to be the

8
thalamus, medial caudate, and nucleus accumbens (NAcc). Among these three, only the

NAcc showed increasing activation during gains but not losses. Importantly, the NAcc is

a brain region rich in the neurotransmitter dopamine (DA). DA has been shown to be

associated with the positive affect of monetary rewards (Breiter, et. al., 2001), but also

has been implicated in the use of drugs such as cocaine (Breiter, et. al., 1997). The

finding of preferential NAcc activation during anticipation of a monetary reward led to

the hypothesis that the NAcc was a neural substrate in the formulation of expected utility.

Consistent with Prospect Theory (Kahneman, et. al., 1979), whereby it was determined

that behavior is different in the presence of gains vs. losses, NAcc was only active during

the anticipation of gains – not losses.

It was determined in a subsequent study (Knutson, 2003), that while the NAcc

was active in the anticipation of a monetary reward it was inactive upon the realization of

the reward itself. While the NAcc is active during the anticipation phase of a gamble, a

cortical region along the medial wall of the prefrontal cortex (MPFC) was active in the

assessment of the realized outcome of the gamble. This finding would indicate that

expected utility and actual utility are assessed in two distinct brain regions; the algorithm

for expected utility lies largely in subcorital brain regions such as the NAcc, while

assessments of actual utility take place in newer and largely human-specific prefrontal

cortex. Knutson characterizes the NAcc as the “gas pedal” that “fuels appetitive

behavior” and the MPFC the “steering wheel” which “directs appetitive behavior towards

appropriate goal objects” (Knutson, et. al., 2003). However, the lack of brain response in

the presence of anticipated losses was termed “somewhat puzzling” in the Knutson

(2005) study.

9
 According to Subjective Expected Utility Theory (SEU) (Savage, 1954),

ambiguity in the underlying probability distribution of a lottery should not affect an

individual’s decision in the presence of uncertainty. Specifically, so long as an individual

is able to make subjective estimates of the probabilities, expected utility is the same

under risk and ambiguity. However, the behavioral literature shows that ambiguity does

indeed affect human decision making. For example, the Ellsberg Paradox (Ellsberg,

1961), shows that subjects do not form subjective probabilities of events – even upon

reflection – and thus display what is know as ambiguity aversion. Hence, one’s

confidence in their ability to intrinsically understand the underlying probability

distribution generating outcomes, has a significant impact on their willingness to accept

risky gambles.

Evidence from the neuroscience literature indicates that the underlying neural

mechanisms which code for risk and ambiguity might in fact be different. In the series of

Knutson studies, the subjects were aware of the probabilities associated with each

outcome. In a subsequent paper “Neural Systems Responding to Degrees of Uncertainty

in Human Decision-Making” (Hsu, et. al., 2005), the authors differentiated between risky

gambles in the traditional sense, and ambiguous gambles in the “Knightian” (1921)

sense. 6 Specifically, Hsu, et. al. used fMRI to determine what brain regions were

differentially responsive to risk vs. ambiguity. It was found that regions most active

during ambiguity were orbitofronal cortex (OFC), and the amygdala. The OFC has been

implicated in integrating emotion and cognition, while the amygdala has been implicated

6
More formally, “risk” in the traditional sense implies that the individual knows the probability distribution
of outcomes. “Knightian” uncertainty assumes that there is ambiguity in the individual’s assessment of
probabilities. In other words in Knightian uncertainty, the individual does not fully know the underlying
probability distribution generating the outcomes. An example of Knightian uncertainty is illustrated in the
Ellsberg Paradox (1961).

10
in the reaction to emotional activity (see for example Hariri, et. al., 2002). Neither the

OFC or amygdala was activated during the risk condition, implying that these brain

regions are specific to ambiguity. Since amygdala activation is associated with fear

responses, one could conclude that amygdala activation in the ambiguity condition would

be an indication that subjects feel fearful when they do not fully understand the likelihood

of outcomes. Amydala activation was not noted in either of the Knutson studies or the

risk conditions in the Hsu study, implying that while individuals may indeed be risk

averse, risk is perceived by subjects in a different way than ambiguity. Thus, the

empirical evidence suggests a substantial disconnect between actual behavior and that

predicted by subjective expected utility theory. The implications of ambiguity aversion

for financial markets will be discussed in section 2.2.

11
2.2 Myopic Loss Aversion

Individuals are naturally assumed to be risk averse. However, the large

differential long run performance between (risky) equities and (riskless) U.S. government

bonds, implies that investor risk aversion is unreasonably high. This empirical

observation has been termed the equity premium puzzle (Prescott, et. al., 1985). As a

possible explanation to the equity premium puzzle Benartzi & Thaler (1995) have put

forth a theory of myopic risk aversion. This idea stems from two primary findings in the

behavioral psychology literature. Firstly, Kahneman & Tversky (1979) showed that

individuals have the tendency to weight losses much larger than gains, making people

willing to go to great lengths to avoid losses. And secondly, the notion of reference

dependence, which causes individuals to assess gains and losses relative to an initial

reference point. If investors are particularly averse to losses, they would presumably

over-invest in relatively riskless fixed income assets relative to equities, pushing the

equity premium to levels not predicted by models based upon expected utility theory.

Consistent with myopic loss aversion, but inconsistent with expected utility

theory, Gneezy and Potters (1997) show that simply lengthening an investors evaluation

period for their investment returns causes them to take larger economic risks. Because

the probability of a loss from a positive expected return gamble (with a known

probability distribution) decreases with time, investors forced to analyze their

investments over longer time horizons are willing to make riskier investments. This

experimental finding is consistent with investors who shrug off current investment losses

by employing the edict, “I’m in it for the long term.” Being in for the “long term”

12
inherently extends the evaluation period thus making the pain of current losses less

salient.

As a neural test of myopic loss aversion Shiv, et. al. (2005), conducted a

laboratory experiment whereby a target group of investors was compared against a

control group. The target group was comprised of 15 patients with brain lesions on areas

known to be associated with the processing of emotions. 7 The authors’ hypothesis was

that the lesion patients would be less risk averse than the controls since their brain lesions

mitigated the affect associated with fear – in this case monetary losses. The study found

that the lesion patients were significantly more likely to take positive expected return

gambles than the control group, and thus the lesion group was more profitable than the

controls. Additionally, while the control group showed increasing levels of risk aversion

after incurring both losses and gains, the target group did not. These results indicate that

particular neural circuitry plays a critical role in decision making under uncertainty. The

patients with a lesser capacity for fear responses showed behavior much more consistent

with that of expected utility theory, and by logical conclusion, rational man as well.

The automatic neural processes which are triggered at times of fear or concern

may often cloud judgment as the negative affect of emotions dominate our ability to

“think clearly”. The “unusually” high levels of risk aversion exhibited by individuals

facing the prospect of a monetary loss may in fact be related to our “off the radar”

responses to fearful stimuli. Although the amygdala receives cortical inputs at times of

heightened fear, the higher functioning role played by our cortex may not be sufficient to

7
Of the patients, 3 had lesions in the amygdala, 8 in the orbitofrontal cortex, and 4 in the right insular
cortex.

13
deter the negative affect of emotion. As LeDoux (1996) notes, “while conscious control

over emotions is weak, emotions can flood consciousness.”

Importantly in the studies mentioned in this section, the subjects in the

experiments faced risk, not uncertainty in the Knightian (1921) sense. In section 2.1 it

was noted that amygdala activation can be caused by Knightian uncertainty. Thus, a

plausible hypothesis for market crashes and failures could be that investors refuse to hold

risky assets purely out of fear rather than rational deliberation. Additionally, if investors

lose confidence in their ability to effectively measure the probability distribution of future

outcomes (which is highly plausible in the midst of a market crash), the heightened

autonomic fear response from such a situation could cause a complete unwillingness to

hold risky assets, and hence lead to market failure. The occasional breakdowns observed

in the financial markets are invariably associated with very high levels of market

volatility. It is not unreasonable to conjecture that at least a portion of the explanation for

market crashes might in fact be due to the dominate effect of fear over cognitive reason.

14
2.3 Novelty Seeking and Aggressive Risk Taking

The dopaminergic reward circuitry is the “pleasure center” of the human brain

and is largely responsible for novelty seeking behavior as well as drug addiction. Breiter,

et. al. (1997) shows that the dopaminergic pathways are heavily involved in the craving

for cocaine. Interestingly, DA pathways are active in the craving phase, rather than the

“rush” one feels post-ingestion of cocaine. Although classical economic theory suggests

that the utility from money is distinct from the goods which money can procure, Breiter

(2001) finds very similar neural pathways active in the prospect of a monetary reward as

in the craving for cocaine. Both the prospect of money and drugs strongly activates the

dopaminergic reward center of the brain, largely in the nucleus accumbens (NAcc). This

finding is consistent with earlier studies on monkeys (see Schultz, et. al, 1997), which

found that the presentation of a stimulus resulted in a burst of firing in the dopaminergic

neurons. Thus, there is convincing evidence that brain regions extensively associated

with the neurotransmitter dopmanine are involved in craving, and more specifically the

prospect of a future reward be it monetary or otherwise.

While most people display what Benartzi & Thaler (1995) refer to as myopic risk

aversion, or extreme aversion to losses, a subset of the population is characterized by the

need for ever larger rewards, sometimes regardless of risk. Pathological gamblers, for

example, seem to recklessly gamble without regard for the consequences of their actions.

Researchers have found that the gene allele D2A1 is associated with pathological

gambling (Comings, 1998). Thus the dopaminergic pathways are strongly implicated in

the behavior of problem gamblers and by implication, excessive risk takers in general.

For these individuals the “high” or “rush” is in the prospect of a gain rather than the

15
outcome itself. The NAcc is active not upon the realization of a reward, but prior to the

realization, or during what a gambler would refer to as the “action”. It is the uncertainty

the gives the individual the high – not the outcome. Interestingly, the drug naltrexone,

which blocks the brain’s opiate receptors has been shown to reduce the incidence of

pathological gambling (Moreyra, et al., 2000) as well as compulsive shoppers (McElroy,

et. al., 1991).

Classical economic theory is at a loss to explain why excessive risk taking exists.

Pathological gamblers are keenly aware that the expected gain on each outcome is

negative. They are aware of the consequences of their actions, but continue to gamble

with total disregard for their actions (National Academy of Sciences, 1999). Because

gamblers are aware of these issues, classical theory cannot explain their behavior;

classical theory would predict that an agent will always refuse a negative expected

lottery. The neurological evidence from studies of drug addicts and gamblers highly

suggests that behavior for certain individuals is related to the affect associated with

craving. The gambler’s need for action is brilliantly illustrated in an episode of the

Twilight Zone. 8 A pathological gambler dies and thinks he is in heaven because he wins

every time he plays. Very quickly after constantly winning his wagers, he requests to be

sent to hell, only to find out that he is already there. The affect of risk taking and

gambling is in the uncertainty – not the outcome.

The problem of novelty seeking may manifest itself in the form of excessive

trading in financial markets. Shiller (1987) finds that the U.S. stock market exhibits

significantly greater volatility than that which would be justified by changes in company

dividends. Thus, a significant proportion of trading in financial markets is not related to

8
“A Nice Place to Visit”, The Twilight Zone, April 15, 1960.

16
changes in fundamentals, but rather due to other factors. The neuroscience evidence

suggests that much of our activity and choices are driven by affect, largely dictated by the

dopaminergic pathways in the NAcc. As a result, trading decisions will not be immune

to the same neurologic impetus that causes the urge to gamble, or even ingest cocaine.

Hence, one may postulate that some of the excess trading (and hence volatility) observed

in financial markets may be due to trading related to affect rather than fundamental

changes in companies’ valuations. This is, of course, conjecture. However, given the

wide body of evidence provided by the fields of behavioral psychology and neuroscience

indicating the importance of novelty seeking in human decision making, a thesis that

cannot be readily dismissed.

17
2.4 Overconfidence

Several psychological biases indicate that people are inherently overconfident.

Self deception theory (see Odean, 1998), for example, indicates that peoples’ estimates of

probabilities are too high when they think the event will occur and too low when they

think it will not. These findings are also consistent with prospect theory which states that

people tend to dismiss altogether low probability events and treat with high probability

events as if they are a certainty. The evidence thus indicates individuals have a tendency

to fool themselves in order to justify behavior. However, if agents are Bayesian updaters,

sequential observations of outcomes inconsistent with an agents’ prior beliefs would lead

a rational person to update their assessment of probabilities over time. This would in turn

reduce the overconfidence bias as individuals sequentially realize the “errors of their

ways”. This however, is clearly not the case. Evidence suggests that individuals are

“lazy” in updating, essentially ignoring information which is inconsistent with beliefs

while at the same time using observations which are consistent with beliefs as

confirmatory evidence (Jenkins, et. al., 1965).

Overconfidence can be the end result of what is known as biased self attribution,

whereby people tend to attribute good outcomes to their own skill and poor outcomes

simply to bad luck (Langer, et. al., 1975). Overconfidence is fed by the confirmatory

bias, whereby people tend to ignore evidence indicating they are wrong, in favor of

evidence that they are right (see for example Forsythe, et. al., 1992). Thus, individuals

are inherently overconfident, not because of lack of evidence, but because we are biased

to always favor observations consistent with our beliefs relative to those which might

dismiss them. Other known biases which lead to over confidence are the sunk cost effect

18
(Arkes, et. al, 1985) and the hindsight bias (Hawkins, et. al., 1990). The sunk cost effect

indicates that people tend be over-attached to things or ideas for which they have

expended a significant amount of resources to procure. For example, if an analyst has put

a significant amount of time into forming an opinion on a stock, she will likely be

beholden to that opinion despite potential contradictory information. The hindsight bias

likely stems from our evolutionary need for self esteem building. The hindsight bias is

based on the notion of rationalization, whereby an individual believes that they “knew it

all along”. A classic modern day example of the hindsight bias is the means which with

people describe the run-up in technology stocks in the late 1990s as the “technology

bubble”. Describing this time period in this fashion connotes that it was widely known

that this was a bubble at the time. However, we only know that the late 1990s were a

bubble with hindsight; at the time, it was called the “new economy”.

The problem of overconfidence is related to what psychologists call cognitive

inaccessibility. While the neural mechanisms of overconfidence are not entirely known,

this bias likely stems from our need to attribute outcomes in a cause-and-effect fashion.

Because the vast majority of actions stem from automatic mechanisms, generally below

our consciousness, we tend to lack the ability to be introspective regarding many of our

actions. For example our autonomic nervous system is busy managing heart rate,

breathing, and blinking, all the while our conscious mind is completely unaware of the

processes. Fear, for example, is not generally considered deliberate. When we encounter

a frightful situation our “fight or flight” mechanisms are activated, and we generally

respond to the situation in the absence of much deliberate thought. In hindsight we may

justify our actions, but at the time, much of our response is automatic. However, human

19
beings have a natural tendency to need to explain outcomes in terms of cause and effect

(i.e. the market is up because the Fed cut rates today). Thus, humans tend to overattribute

outcomes to controlled rather than automatic processes. “I don’t know” is not generally a

socially acceptable explanation for why one took a particular action. Attention, for

example, is largely dictated by automatic neural mechanisms. If our attention is drawn to

noise rather than true signal, decisions will be overweighted by the noise component.

This is particularly true when one considers that cognitive deliberation is neurologically

“expensive”. Thus, when an individual attempts to explain their actions in hindsight,

they will attribute their action to conscious deliberation, which in turn feeds the

overconfidence effect.

There is a growing body of literature in the domain of behavioral finance around

the concept of overconfidence. Daniel, et. al. (2001) postulates a framework whereby a

subset of investors are systematically overconfident in their assessment of information

germane to the valuation of a risky asset. The justification for this assumption is based

on the vast body of psychological literature which indicates that people overestimate their

own expertise. The authors show that when a subset of the population is overconfident

about private signals, many of the well-documented return anomalies in finance appear.

For example, the authors find that when investors are overconfident, the cross section of

stock returns is explained by not only the market beta, but by fundamental ratios such as

book-to-price as well (see Fama and French, 1992, for a discussion of the book-to-market

effect). Additionally, a stock’s book-to-market ratio is positively related to future stock

prices as the overconfident investors overreact to their private signals. Scheinkman and

Xiong (2005) show a similar result whereby asset price bubbles are a function of investor

20
overconfidence. Overconfidence can be a more general application of heterogeneous

beliefs, which has been shown to lead to systematic mis-valuation of assets and hence

return predictability (Harrison and Kreps, 1978).

21
2.5 Emotions and Self Control

The central human dilemma is one between affect and cognition, emotions largely

dictated by automatic and controlled mechanisms, respectively. Novelty seeking is

driven by affect, while rational man is assumed to be motivated purely by cognition. The

fact that much of our experienced affect is a result of biological and neurological

mechanisms that lie below our consciousness, complicates our understanding of our own

behavioral responses to the world around us. Humans are unique in our ability to delay

current gratification for future gratification. Most animals are driven purely by short term

objectives as they lack the cognitive introspection required to make complex

intertemporal consumption tradeoffs. This ability appears to be uniquely human.

Our evolved prefrontal cortex distinguishes us from other mammals and is the

part of our brain that is active in making the tradeoffs between future and current

consumption decisions (Manuck, et. al., 2003). Our desire for current consumption is

driven largely by affective states, which as described earlier, are dictated by the

dopaminergic pathways in our mid-brains. The significance that the PFC plays in our

ability to delay gratification is best exemplified in the famous case of Phineas Gage.

Upon incurring a massive brain injury whereby both of his frontal lobes were destroyed,

Gage’s behavior became increasingly dominated by novelty seeking, with a lack of

appreciation for future consequences. 9 Essentially, Gage lacked the “cognitive over-

ride” required for an individual to suppress novelty seeking behavior.

Expected utility theory conjectures that individuals behave consistently in their

choices. For example, it is expected that people show consistency in risk aversion and

9
Macmillan, M. (2000). Restoring Phineas Gage: A 150th retrospective. Journal of the History of the Neurosciences,
9, 42-62.

22
time preferences: If a person prefers A to B today, he should prefer A to B tomorrow. If

he prefers to consume Y tomorrow rather than X today, she should prefer to consume Y

two days from now to X tomorrow, etc. However, there is strong evidence that peoples’

preferences are state contingent and can be driven in large part by affect. People who are

in good moods tend to make more optimistic choices (Wright and Bower, 1992). For

example, it has been shown that sales of lottery tickets in Ohio increase in the days

following a victory by the Ohio State football team (Arkes, et. al, 1985). Thus human

behavior can be time inconsistent; peoples’ choices are a function of their time preference

and risk aversion, but also of affective states.

The notion of discounted expected utility (Samuelson, 1937) is well documented

in expected utility theory. The DU model assumes that individuals prefer current

consumption to future consumption, and that this tradeoff can be measured by

discounting future utilities in an exponential fashion. Experimental psychology,

however, has shown that discount rates can change dramatically with circumstances and

that rates are a function of affective states (Lowenstein and Prelec, 1992). Additionally,

the way a prospect is framed, or described, can affect the intertemporal decisions of

individuals. Several researchers have shown that humans tend to discount future utilities

in a hyperbolic fashion. 10 In other words, individuals significantly prefer current

consumption relative to that predicted by the DU model. This finding has very

interesting implications for purchases such as gym memberships, for example. Because

instantaneous consumption is so preferred to future consumption, individuals will

purchase gym memberships with the intent of exercising in the future. However, when

10
See for example Ainslie (1975), Thaler (1981), and Lowenstein and Prelec (1992).

23
the future actually arrives, the sedentary choice may dominate the exercise choice, as

hyperbolic discount would predict.

The inordinate need for current consumption as predicted by hyperbolic

discounting is a function of the neural tradeoff between the role of affective vs. cognitive

systems. Our need for novelty as dictated by the dopaminergic pathways drives our need

for current consumption. McClure, et. al. (2004) used fMRI to show that decisions based

on instant reward activated parts of the limbic system associated with the dopamine

pathways. Conversely, it was found that tradeoffs involving delayed monetary rewards

largely activated regions of the lateral prefrontal cortex, the brain region associated with

cognitive introspection. These results illustrate the importance that the limbic system

plays in human decision making; the inability to tradeoff current reward for future utility

is driven by brain regions associated with novelty seeking as well as the craving for

drugs. Hence the evidence from neuroscience is clear: our well documented need for

instant gratification, and the extent to which this need exceeds that predicted by the DU

model, is a function of our cravings as dictated by the our dopaminergic pathways. Our

inability to rationally tradeoff current consumption for future consumption can be

characterized by a distinction between our more primal needs for novelty vs. the rational

decision as described by homo economicus – namely to postpone current consumption in

favor of future consumption.

24
2.5 Herd Behavior

Perhaps no single behavioral phenomenon is of more interest to financial

economists than that of herd behavior. Peoples’ need to follow the crowed is ultimately

the source of all financial market bubbles and crashes observed throughout time.

Whether describing the irrational demand for tulips in the 17th century or for technology

stocks in the late 20th century, humans have a clear desire to do as others do. Such

mimicry may be optimal in an environment of learning. For example, if one desired to

learn pole vaulting, a logical starting point would be to emulate other, more experienced,

pole jumpers. In financial markets, where the current price of an asset is driven entirely

by supply and demand, excessive demand for a risky asset can quickly push its price to a

level not justified by its expected future value or cash flows.

Some theories of bubbles have been developed under the assumption of

rationality. For example Brunnermeier (2003), describes an environment whereby a

rational bubble can develop because each sequential agent in a market economy buys the

asset, despite the fact that they know it is overvalued. Models such as this are predicated

on the “greater fool” assumption, whereby rational agents assume that somebody else

will be naïve enough to purchase the asset from them in the future at a higher price.

Other theories of herd behavior, however, do not rely on rationality and in fact assume

that such behavior is highly irrational. Hirshleifer, et. al. (1992) describes human society

as being characterized local conformity, or the empirical observation that groups of

individuals in similar environments tend to behave similarly. One necessary ingredient

for the need for conforming behavior to develop is conformity preference (Jones, 1984).

This bias describes the need for humans to conform to the cultural norms and fads of the

25
group in which they happen to reside. The authors go on to show that under fairly

general conditions, herd behavior can develop easily and unpredictably and without

regard for the consequences of such action. Furthermore, the authors show that fads are

fragile in nature and can breakdown rapidly with little exogenous impetus. Ultimately,

the decision to overly rely on the actions of others in forming one’s own actions is a

result of bounded rationality.

Of fundamental interest to the field of neurofinance is the neurological basis of

herd behavior. As described earlier, cognitive introspection is a uniquely human

characteristic that allows us to look deeper into our own actions and emotions. Such an

exercise, however, is biologically expensive; namely the requirements of cognitive

introspection draw largely on our prefrontal cortex – the area of the brain responsible for

conscious thought and override – and hence require a significant amount of biological

resources in doing so. In a complex social environment whereby individuals are

bombarded with large quantities of information, the costs of cognitive introspection can

become onerous. Furthermore, if environmental inputs draw on emotional brain regions,

the signal received from the midbrain may dominate our ability for our prefrontal cortex

to intervene. For example, it has been shown that providing men pornographic images of

women dramatically changes their time preference, making them more inclined toward

instant gratification (Ariely and Loewenstin, 2006) and risk taking. Shiv and Fedorikhin

(1999) show that taxing our cognitive brain regions (in this case by requiring individuals

to memorize a two digit vs. seven digit number) lead to less self control. Further

complicating the matter is the evidence that human beings are hyper-social. In other

words, we enjoy being around others and using others’ information in the formulation of

26
our own ideas of the world. Social behavior has a neurological basis. For example, Zak

(2007) shows that social attachment is evolutionarily old and recruits emotion and reward

pathways in the brain.

The world around us is undoubtedly complicated, requiring us to take in vast

quantities of information, deciding which information is relevant and discounting the rest.

Our prefrontal cortex is constantly taxed by extraneous stimuli, requiring us to decipher

signal from noise - a particularly problematic endeavor when the signals we receive

affect our emotional brain regions. Homo economicus is able to easily handle such an

environment, with precise measures of probabilities and states of nature, effortlessly

discarding irrelevant information and properly weighting information which is important.

Human beings, however, are not immune from making errors in judgment, particularly

when exogenous, emotionally-based information is pervasive. Because the world is

“noisy” (i.e. not all information is relevant to rational decision making), deciphering

which information contains signal relevant to our decisions and that which does not

requires significant cognitive deliberation and hence is biologically costly. Additionally,

we are constantly exposed to emotional stimuli, which generates conflict between our

need for novelty and the cognitive deliberation of rational man. Observing the behavior

of others and using their actions as information is a relatively inexpensive signal for

individuals to analyze and act upon. For example, one may not know the true value of a

stock, since assessing value requires complex calculations of probabilities and states of

nature. However, observing others purchasing a stock provides an easily-digestible piece

of information. Shiller (1984) notes that “Investors spend a substantial part of their

leisure time discussing investments, reading about investments, or gossiping about

27
others’ successes or failures in investing.” The social aspect of investing, namely using

others’ information in the formulation of our own decisions, largely results from our need

to economize our brains’ cognitive functions through the use of relatively costless

information (i.e. observing others’ behavior).

The resultant herd mentality is particularly problematic in the realm of financial

markets. The aggregate decisions of individuals create an environment whereby the

sequential decisions of presumably independent actors can cause the price of an asset to

greatly exceed its valuation. This of course defies the model of rational man, as a purely

rational agent does not consider the actions of others in his investment formulation.

Reflecting the aggregate actions of real human beings, however, financial market bubbles

can develop as each individual attempts to economize on the brains’ scarce resources

through the use of the relatively costless signals of observing others. One can consider

this the “outsourcing” of investment management: by relying on the signals of others, we

are effectively using societal signals to provide investment recommendations and hence

allowing us to utilize our deliberative brains in other areas. Ultimately, or course, prices

correct to their fair (equilibrium) value, often resulting in a significant market correction

or crash. Thus, while at the individual level the decision to economize by using societal

signals rather than our own may seen rational, the aggregate effect of thousands of people

doing exactly the same thing results in significant over-valuation of risky assets and

subsequently a correction.

The crash of a market bubble is no less the result of herd mentality than the

irrational rise in valuations that preceded it. As described in Hershleifer (1992), herd

behavior can be “idiosyncratic” and “fragile”. In other words, relatively small exogenous

28
pieces of information can cause an information cascade to crumble very quickly. In the

spirit of economizing on biological resources, individuals will look to others,

overemphasizing others’ signals in the formulation of their own decisions. When panic

selling ensues subsequent to a market bubble, other individuals will sell, essentially

emulating the actions of their peers. Recall earlier the in section 2.1, it was noted the

distinction between the concepts of risk and uncertainty. We never know the true

underlying probability distribution of outcomes, but in highly chaotic environments, our

confidence in our estimates of such parameters becomes increasingly clouded. Thus, as

the paranoia of a market correction continues, our perception of the risk we incur from an

investment quickly approaches of that of Knightian uncertainty. Knightian uncertainty

triggers activation in the brain region associated with fear regulation – the amygdala –

resulting in heightened levels of fearful emotion. As decisions become increasingly

dominated by the emotion of fear, our cognitive mechanisms effectively shut down

resulting in panic selling. Hence, when we lose all confidence in our probability

assessments of future states of nature, our actions become dominated by fear response in

lieu of cognitive deliberation. The end result is not only a market crash but often times,

the price of a risky asset falling well below its fundamental value.

29
 3. Conclusion

Humans differ starkly with respect to concepts such as risk aversion, time-

preference, and tastes. We are now beginning to learn where these distinctions reside

neurologically, as recent technological advances in the field of neuroscience have helped

us in identifying the neural mechanisms responsible for human decision making.

Behavioral psychologists have known for years that human life is about the struggle

between the affect associated with novelty and the cognitive override that we are all

capable of using to “intervene”. We now know that this conflict has a neurological basis

and is described by specific brain regions. The interplay between these brain regions is

what dictates actual human behavior, and helps to explain why people behave is such

varying ways.

Recently behavioral economists have leveraged the findings from psychology and

neurology, developing the burgeoning field of neuroeconomics. Currently, the field of

neurofinance is exploiting many of these same ideas to better understand the

implications for financial markets. Many of the known behavioral concepts from

psychology, such as overconfidence and herd mentality, have a neural basis. As a

result, we are building a richer understanding of how the individual actions of human

beings translate into aggregate market phenomena. Such findings have implications for

issues as wide ranging as stock market bubbles to the predictability of asset prices.

These results have helped to challenge many of the theories of economists who espouse

the rational school of thought. Because neuroeconomics has shown us that human

beings are neurologically wired in a fashion which is inconsistent with the assumptions

of hyper-rationality, we are beginning to develop a much richer understanding of the

30
 connection between behavior and outcomes. As we learn more about actual human

behavior as well as behavior’s neurologic basis, concepts such as market efficiency are

no longer deemed to be sacrosanct.

As Harvard economist Niall Ferguson has noted, “The real point, however, is that

stock markets are mirrors of the human psyche. Like Homo sapiens, they can become

depressed. They can even suffer complete breakdowns.” 11 Ferguson’s quote implies

that stock markets are reflections of human behavior, not that of Homo economicus. If

humans are rational in the traditional sense, then markets naturally will reflect such

rationality through purely efficient pricing. However, we know that humans are rarely

fully rational; we are characterized by numerous biases and internal conflicts, resulting

in decision making often at odds with that of rational man. As a result, the prices of

financial assets reflect real human behavior, and thus can indeed become depressed. So

long as prices are determined by the aggregate decisions of human beings, they will

convey not only fundamental valuation, but fear and paranoia, exhilaration and

euphoria as well. Markets do indeed reflect the human psyche, but the human psyche is

imperfect. Life’s Rich Pageant continues.

11
“Wall Street Lays Another Egg”, Vanity Fair, December 2008.

31
 REFERENCES

Abreu, D., and M. Brunnermeier, 2002, Synchronization Risk and Delayed Arbitrage,
Journal of Financial Economics 66, 341-360.

Ainslie, G., 1975, Specious Reward: A Behavioral Theory of Impulsiveness and Impulse
Control, Psychological Bulletin 82, 463-496.

Ariely, D. and G. Loewenstein, 2006, The Heat of the Moment: The Effect of Sexual
Arousal on Decision Making, Journal of Behavioral Decision Making 19, 87-98.

Arkes, H. and C. Blumer, 1985, The Psychology of Sunk Costs, Organizational Behavior
and Human Decision Processes 35, 124-140.

Arrow, K., 1971, Essays in the Theory of Risk Bearing, North-Holland Publishing Co.,
Amsterdam.

Ashraf, N., Camerer, C. and G. Loewenstein, 2005, Adam Smith, Behavioral Economist,
Journal of Economic Perspectives 19,

Benartzi, S., and R. Thaler, 1995, Myopic Loss Aversion and the Equity Premium Puzzle,
The Quarterly Journal of Economics CX, 73-92.

Breiter, H., Weissskoff, R., Kennedy, D., Makris, N., Berke, J., Goodman, J., Kantor, H.,
Gastfriend D., Riorden, J., Mathew, T, Rosen, B., and S. Hyman, 1997, Acute Effects
of Cocaine on Human Brain Activity and Emotion, Neuron 19, 591-611.

Breiter, H., Aharon, I, Kahneman, D., Dale, A., and P. Shizgal, 2001, Functional Imaging
of Neural Responses to Expectancy and Experience of Monetary Gains and Losses,
Neuron 30, 619-639.

Camerer, C., Loewenstein, D. and D. Prelec, 2005, Neuroeconomics: How Neuroscience

Can Inform Economics, Journal of Economic Literature XLIII, 9-64.

Camerer, C., Ho, T., and N. Lim, 2006, Modeling the Psychology of Consumer and Firm
Behavior with Behavioral Economics, CalTech Working Paper.

Coase, R., 1960, The Problem of Social Cost, Journal of Law and Economics 3, 1-44.

Comings, D., 1998, The Molecular Genetics of Pathological Gambling, CNS Spectrums
3, 20-27.

Daniel, K., Hirshleifer, D, and A. Subrahmanyam, 2001, Overconfidence, Arbitrage, and

Equilibrium Asset Pricing, Journal of Finance 3, 921-965.

32
Ellsburg, D., 1961, Risk, Ambiguity, and Savage Axioms, Quarterly Journal of
Economics 75(4), 643-669.

Fama, E., 1970, Efficient Capital Markets: A Review of Theory and Empirical Work,
Journal of Finance 25(2), 383-417.

Fama, E. and K. French, 1992, The Cross Section of Expected Stock Returns, Journal of
Finance 47, 427-465.

Forsythe, R., Nelson, F., Neumann, G., and J. Wright, 1992, Anatomy of an Experimental
Political Stock Market, American Economic Review 82, 1142-1161.

Gneezy, U. and J Potters, 1997, An Experiment on Risk taking and Evaluation Periods,
The Quarterly Journal of Economics, 631-645.

Hawkins, S. and R. Hastie, 1990, Hindsight: Biased Judgements of Past Events After the
Outcomes are Known, Psychological Bulletin 107, 311-327.

Hariri, A., Mattay, V., Tessitore, A., Kolachana, B., Fera, F., Goldman, D., Egan, M., and
D. Weinberger, 2002, Serotonin Transporter Genetic Variation and the Response of
the Human Amygdala, Science 297, 400-403.

Harrison, J. and D. Kreps, Speculative Investor Behavior in a Stock Market with

Heterogeneous Expectations, The Quarterly Journal of Economics 92, 323-336.

Hirshleifer, D., 2001, Investor Psychology and Asset Pricing, Journal of Finance 4,
1533-1597.

Hsu, M., Bhatt, M., Adolphs, R., Tranel, D., and C. Camerer, 2005, Neural Systems
Responding to Degrees of Uncertainty in Human Decision-Making, Science 310,
1680-1683.

Jenkins, H., and W. Ward, 1965, Judgment of Contingency Between Responses and
Outcomes, Psychological Monographs 79, 1-17.

Jensen, J., 1906, Sur les fonctions convexes et les inégalités entre les valeurs moyennes,
Acta Mathematica 10, 175-193.

Jones, S., 1984, The Economics of Conformism, Oxford: Blackwell Publishing.

Kahneman, D. and A. Tversky, 1979, Prospect Theory: An Analysis of Decision Under

Risk, Econometrica 47, 263-291.

Knight, F., Risk, Uncertainty, and Profit, Library of Economics and Liberty.

33
Knutson, B., Adams, C., Fong, G., and D. Hommer, 2001a, Anticipation of Increasing
Monetary Reward Selectively Recruits Nucleus Accumbens, Journal of Neuroscience
21.

Knutson, B., Adams, C., Fong, G., Varner, J., and D. Hommer, 2001b, Dissociation of
Reward Anticipation and Outcome with Event-Related fMRI, Neuroreport 12, 3683-
3687.

Knutson, B., Adams, C., Fong, G., Varner, J., and D. Hommer, 2003, A Region of Mesial
Prefrontal Cortex Tracks Monetarily Rewarding Outcomes: Characterization with
Rapid Event-Related fMRI, Neuroimage 18, 263-272.

Knutson, B. and R Peterson, 2005, Neurally Reconstructing Expected Utility, Games and
Economic Behavior 52, 305-315.

Langer, E., 1975, The Illusion of Control, Journal of Personality and Social Psychology
32, 311-328.

Langer, E. and J. Roth, 1975, Heads I Win, Tails It’s Chance: The Illusion of Control as
a Function of the Sequence of Outcomes in a Purely Chance Task, Journal of
Personality and Social Psychology 32, 951-955.

LeDoux, J., 1996, The Emotional Brain: The Mysterious Underpinnings of Emotional
Life, New York: Simon and Schuster.

Loewenstein, G. and D. Prelec, 1992, Anomalies in Intertemporal Choice: Evidence and

an Interpretation, The Quarterly Journal of Economics 107, 573-597.

Manuck, S., Flory, J., Muldoon, M., and R. Ferrell, 2003, A Neurobiology of
Intertemporal Choice, in Time and Decision: Economic and Psychological
Perspectives on Intertemporal Choice, New York: Russell Sage Foundation, 139-
172.

McClure, S, Laibson, D., Loewenstein, G., and J. Cohen, 2004, Separate Neural Systems
Value Immediate and Delayed Monetary Rewards, Science, 306, 503-507.

McElroy, S., Satlin, A., Pope, H., Keck, P., and J. Hudson, 1991, Treatment of
Compulsive Shopping with Antidepressants: A Report of Three Cases, Annals of
Clinical Psychiatry 3, 199-204.

Moreyra, P., Ibanez, A., Saiz-Ruiz, J., Nissenson, K., and C Blanco, 2000, Review of the
Phenomenology, Etiology and Treatment of Pathological Gambling, German Journal
of Psychiatry 3, 37-52.

National Academy of Sciences, 1999, Pathological Gambling, Washington D.C.,

National Academy Press.

34
Neumann, J., and O. Morgenstern, 1944, Theory of Games and Economic Behavior,
Princeton University Press, Princeton, NJ.

Odean, T., 1998, Volume, Volatility, Price, and Profit When All Traders Are Above
Average, Journal of Finance 53, 1887-1934.

Prescott, E., and R. Mehra, 1985, The Equity Premium: A Puzzle, Journal of Monetary
Economics 15(2), 145-161.

Samuelson, P., 1937, A Note on Measurement of Utility, Review of Economic Studies 4,

155-161.

Savage, L., 1954, Foundations of Statistics, John Wiley and Sons, NY.

Scheinkman, J. and W. Xiong, 2003, Overconfidence and Speculative Bubbles, Journal

of Political Economy 111, 1183-1219.

Shermer, M., 2007, The Mind of the Market, Times Books, New York, NY.

Shiller, R., 1984, Stock Prices and Social Dynamics, Brookings Paper on Economic
Activity 2, 457-510.

Shiller, R., 1987, The Volatility of Market Prices, Science 235, 33-37.

Shiv, B., and A. Fedorikhin, 1999, Heart and Mind in Conflict: The Interplay of Affect
and Cognition in Consumer Decision Making, Journal of Consumer Research 26,
278-292.

Shiv, B., Loewenstein, G., Bechara, A., Damasio, A., and H. Damasio, 2005, Investment
Behavior and the Dark Side of Emotion, Psychological Science 16, 435-439.

Simon, H.A., 1955, A Behavioral Model of Rational Choice, Quarterly Journal of

Economics 69, 99-118.

Simon, H.A., 1956, Rational Choice and the Structure of Environments, Psychological
Review 63, 129-138.

Smith, A., 1759 [1981], The Theory of Moral Sentiments, Liberty Fund, Indianapolis.

Thaler, R., 1981, Some Empirical Evidence on Dynamic Inconsistency, Economic Letter
8, 201-207.

Thaler, R., 1991, The Winner’s Curse: Paradoxes and Anomalies of Economic Life, New
York: Free Press.

35
Tversky, A. and D. Kahneman, 1981, The Framing of Decisions and the Psychology of
Choice, Science 211, 453-458.

Wright, W. and G. Bower, 1992, Mood Effects on Subjective Probability Assessment,

Organizational Behavior and Human Decision Processes 52, 276-291.

Zak, P., Stanton, A., and S. Ahmadi, 2007, Oxytocin Increases Generosity in Humans,
PLoS ONE 2, 1-5.

36