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This laboratory is dedicated to the study of human perception of financial risk. Unlike neoclassical or behavioral finance, we do not treat humans as black boxes. Instead, we study brain processes in order to understand how risk perception leads to revealed choice.
The starting point for our research is the fact that financial risk is different from environmental risk in many respects. Humans have only recently been exposed to financial risk, raising the question whether the brain is well adapted to evaluate it. Our investigations may therefore uncover the physiological bases for alleged cognitive biases. One must keep into account, however, that the human brain has the plasticity to successfully exploit processes within existing structures in order to adapt to novel environments.
Here are some of the questions that engage our laboratory.
- Are (financial) risks and rewards encoded in the brain in terms of a single-dimensional "utility index" or are they decomposed in a way that facilitates analysis and learning? (The latter is the case; see our 2006 Neuron article.)
- Effective learning requires one to keep track of prediction risk. Is there a prediction risk signal in the brain?
- Is prediction risk updated adequately, perhaps by means of a prediction risk error?
- How are the various facets of risk (expected reward, variance, kurtosis,...) re-integrated?
- Monetary loss and pain seem to be processed differently in the brain. What are the consequences?
- Is the brain Bayesian, in the sense that its signals reflect perception of hidden causes behind observable phenomena? Perception of hidden causes generally improves decision making. Or does the brain learn merely by correlating observable phenomena, as in traditional conditioning theories? (It is the former; see our 2006 Journal of Neuroscience article.)
- How does the brain read information from complex social structures such as anonymous financial markets? Does it resort to anthropomorphizing, treating the market as a human opponent with its own mind, beliefs, intentions and even emotions? Does it apply Theory of Mind to read markets?
Last updated August 2006
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