Neural Basis of Financial Risk Taking

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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.


NAcc represents gain prediction (Knutson et al., 2001), while anterior insula represents loss prediction.„,

According to financial models,

  • One can define risk-neutral choices based on Bayesian updating as rational and deviations from these choices as irrational
  • The results therefore indicate that, above and beyond contributing to rational choice, anticipatory neural activation may also promote irrational choice
  • Thus, financial decision making may require a delicate balance—recruitment of distinct circuits may be necessary for taking or avoiding risks, but excessive activation of one mechanism or the other may lead to mistakes….

While experts and nonexperts who differed in terms of prior coursework in finance and statistics did not significantly differ in behavior in this experiment, future research should also examine the influence of individual differences in trading experience on financial risk taking, since

  • Psychophysiological evidence suggests that experienced traders may show less emotional responsiveness to market events than inexperienced traders (Lo and Repin, 2002)
  • While many psychophysiological measures (e.g., skin conductance, heart rate, pupillary dilation) index anticipatory arousal, the current results suggest that measures that probe anticipatory valence will also be necessary to predict the likelihood of subsequent risky choice.

Overall, these findings suggest:

  • Risk-seeking choices (such as gambling at a casino) and risk-averse choices (such as buying insurance) may be driven by two distinct neural circuits involving the NAcc and the anterior insula
  • The findings are consistent with the notion that activation in the NAcc and anterior insula, respectively, index positive and negative anticipatory affective states and that activating one of these two regions can lead to a shift in risk preferences
  • This may explain why casinos surround their guests with reward cues (e.g., inexpensive food, free liquor, surprise gifts, potential jackpot prizes)—anticipation of rewards activates the NAcc, which may lead to an increase in the likelihood of individuals switching from risk-averse to risk-seeking behavior. A similar story in reverse may apply to the marketing strategies employed by insurance companies.

Consideration of risk necessarily involves weighing potential gains against potential losses.

  • The notion that distinct neural mechanisms anticipate gain versus loss suggests a novel componential view of risk taking
  • Combined with such a view, these findings provide neural targets for investigating complex risk phenomena such as loss aversion, in which people weigh losses more than gains of equivalent size (Kahneman and Tversky, 1979)

These findings further imply that neuroeconomic research may foster a more comprehensive theory of individual decision making than the rational actor model and thus may ultimately yield new insights relevant to economic policy and institutional design….”