The Brain’s Reaction to Market Bubbles
Thinking you know what the intentions of other investors are could put you at greater financial risk during bubbles. The assignment of intentionality explains why. Humans have long assigned intention to interpret complex behavior, a concept known as theory of mind.
In the case of bubbles, there is a correlation between theory of mind abilities and increased blood flow to the ventromedial prefrontal cortex) and the dorsomedial prefrontal cortex . The vmPFC encodes value, while the dmPFC is associated with being able to judge how others will act. The authors view this activity as suggesting “participants are taking into account the intention of other players in the market (or of the market as whole) while updating their value estimates, and that this effect is mediated by the interaction between dmPFC and vmPFC.”
Though brain activity does fluctuate during normal, non-bubble market conditions, the brain activity observed in this California Institute of Technology study is specific to bubble markets. The study’s authors say the interaction between dmPFC and vmPFC is a response to real or perceived changes in intentionality.
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