Practical analysis for investment professionals
06 July 2015

Some Neuroeconomics Tips for Improving Investment Decision Making

Posted In: Behavioral Finance

Brain scan

Neuroeconomics — using neuroscience to study economic and social decision making — may often be associated with gambling, poker, and slot machines, but is increasingly being applied to more fundamental economic questions. Revolutions in science have and continue to inform our perceptions and decisions. Indeed, Robert Shiller, professor of economics at Yale University and co-creator of the Case-Shiller Index, said with regard to the “neuroeconomic revolution” that “a field of science can turn barren if no fundamentally new approaches to research are on the horizon.”

Scott Huettel, professor of neuroeconomics at Duke University, notes that neuroeconomics adds another page to the story of behavioral finance and its cousin behavioral economics. These two fields, he says, have operated as “bodies in isolation” that can predict general sets of biases. By further utilizing underlying features of human biology and the human brain, however, neuroeconomics enables Huettel to “predict whole sets of biases that turn out to be interrelated.”




So, what does this developing field offer to investment professionals? In an interview with Jason Zweig, the investing and personal finance columnist for the Wall Street Journal, Huettel explains how the brain’s natural processes affect financial decision making: the brain encodes in terms of reference points and in relative terms, inviting investors to overanalyze recent market trends — a dangerous temptation. In addition to discussing other common investor pitfalls and how emotions can impede investment decisions, he notes the findings of neuroscientists can also be helpful in simulating future situations and in setting aspirational levels to calibrate with current investments. Check out the video above for more and check out Huettel’s website for more of his research.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo credit: ©iStockphoto.com/haydenbird

About the Author(s)
Hadley Chu

Hadley Chu is the Investor Education intern at CFA Institute. She is pursuing a Bachelor's degree in economics at Princeton University.

6 thoughts on “Some Neuroeconomics Tips for Improving Investment Decision Making”

  1. david kamran says:

    Excellent article … thxxxx!!!! – David Kamran, CEO of Knowledge_sciences (CHGO)

  2. It’s interesting to see that personal finance is more personal than it is financial. Interesting post, Hadley. I like your name, by the way!

  3. Michal Stupavsky, CFA says:

    Dear Hadley,

    many thanks for this excellent note. It was nice to see several core points from the Prospect Theory of Kahneman and Tversky in there.

    Best,
    Michal

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