Why Do Financial Bubbles Happen? – A Neuroscience Perspective

Economic bubbles occur when investors trade assets at prices much higher than their actual values. Now Caltech researchers may have uncovered the neurological basis behind such seemingly illogical behavior.  In economics, price and fundamental value are supposed to be the only two factors needed for making trading decisions. While behavior should be predictable based on those values, this isn’t true in a bubble market. De Martino and colleagues suspected that there is some other type of information that traders use. Based on research in the past decade, the authors believed that an area of the brain located just between the eyebrows, the ventromedial prefrontal cortex, or vmPFC, might be involved. “This area is known to code for any type of subjective value.” \”So people are not only considering price and fundamental value, they’re also taking social signals into account”. De Martino explained that people have the tendency to see intentional patterns everywhere, even when there is no intention behind the pattern.

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About Giorgio Bertini

Director at Learning Change Project - Research on society, culture, art, neuroscience, cognition, critical thinking, intelligence, creativity, autopoiesis, self-organization, rhizomes, complexity, systems, networks, leadership, sustainability, thinkers, futures ++
This entry was posted in Brains, Economics, Neuroeconomics, Neuroscience and tagged , , . Bookmark the permalink.

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