Brain

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Bloomberg Markets Month 2006

Brian Knutson says stocks, like sex, addle the brain.

B l o o m b e r g M a r ke t s March 2006 C O V E R S T O RY

By Adam Lev y
‚Late at night, in a basement laboratory at Stanford University, Brian Knutson

made a startling discovery: Our brains lust after money, just like they crave sex. It was May 2004, and Knutson, a professor of neuroscienceand psychology at the California university, was sending student volunteers through a highpower imaging machine called an fMRI. Deep inside each subject’s head, electrical currents danced through a bundle of neurons about the size and shape of a peanut. Blood was rushing to the brain’s pleasure center as students executed mock stock and bond trades. On Knutson’s screen, this region of the brain,the core of human desire, flashed canary yellow. The pleasure of orgasm, the high from cocaine, the rush of buying Google Inc. at $450 a share—the same neural network governs all three, Knutson, 38, concluded. What’s more, our primal pleasure circuits can, and often do, override our seat of reason, the brain’s frontal cortex, the professor says. In other words, stocks, like sex, sometimes drive uscrazy.

Scientists plumb the mind to learn how fear and greed drive Wall Street.

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PHOTOGRAPH BY MARKHAM JOHNSON

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Bloomberg Markets March 2006

C O V E R S T O RY : N E U R O F I N A N C E

Knutson says he knows how heretical his findings are. Wall Street is dedicated to the principle that when it comes to money, logic prevails, that intellectmatters in investing. The idea is enshrined in the economic theory of rational expectations, for which Robert Lucas won the Nobel Memorial Prize in Economic Sciences in 1995. Lucas, a professor of economics at the University of Chicago, maintains that people make economic choices based on all the information available to them and learn from their mistakes. As a result, their expectations about thefuture—from the price of Citigroup Inc. stock next week to the earnings of General Motors Corp. next quarter—are, on average, accurate.

community, you’d better pay very serious attention to them.” To proponents such as Kahneman, the potential of neurofinance seems virtually limitless. One day, brain science may help money managers spot shifts in investor sentiment, says David Darst, chiefinvestment strategist for the $700 billion individual investor group at New York–based Morgan Stanley. Armed with brain scans, psychotherapists may be able to hone traders’ natural impulses of fear and greed. Neuroscientists may even develop psychoactive drugs, or neuroceuticals, that make people better, more-profitable traders, Knutson and other psychologists say. Look at Prozac. In the space of a fewyears, Prozac and other drugs have not only revolutionized the treatment of depression but also pror so the theory goes. In practice, of course, investors foundly changed the way we view the mind. People recdo foolish things all the time. Some gamble away for- ognize that chemistry drives their brains, moods and tunes on money-losing investments, doubling down behavior—and that chemistry canchange them. Similar when logic tells them to fold, or letting winnings ride when drugs, ones that improve a trader’s decision making by 20– the rational person would cash out. Others seem to have an 30 percent, may be just a few years away, says Zack Lynch, uncanny knack for knowing when to buy and sell. In the managing director of NeuroInsights, a San Francisco–based 1970s, Richard Dennis parlayed aninitial stake of several consulting firm that tracks the $100 billion neurotechthousand dollars into a $200 million fortune trading com- nology industry. If these neuroceuticals work, they could modities in the Chicago futures pits. In the 1980s, hedge fund rock Wall Street. “The whole investment community will be icon Paul Tudor Jones made $80 million by betting against scrambling to get these...