Brain activity warns against buying stocks: Study

Scientists have identified brain regions that caution people from buying stocks, a finding that may explain why many people shy away from making supposedly riskier forms of investment, despite long-term profit expectations.

Researchers from the University of Bonn in Germany have developed a model that makes real-life stock buying behaviour comprehensible for the first time.

Researchers combined socioeconomic, psychological and neuroscientific data in an innovative way. They examined a total of 157 male subjects aged 29 to 50 years.

The study, published in the journal Scientific Reports, found that the cortical regions of the "anterior insular" are more active among people who do not trade stocks. In experienced stock traders, the activity of this region of the brain was lower.

"In this age group, we can assume that all participants have gained at least some experience with financial investments and that their decisions are more realistic," said Alexander Niklas Hausler, doctoral student at University of Bonn.

By limiting the study to male participants, gender-specific effects were excluded.

The participants first answered questionnaires on their economic situation, their investment behaviour and their willingness to take risks.

They then underwent a functional Magnetic Resonance Imaging (fMRI) scan whilst repeatedly answering the question: Should I buy a safe bond or perhaps make twice as much profit with a stock?

After the decision was made by pressing a button, the stock outcome was displayed and the final sum of the experiment was later paid out to the participants. To allow for an adequate statistical evaluation of the results, each choice was repeated by the participants a total of 96 times.

The experiment showed that the "anterior insular," which is found in both hemispheres of the cerebral cortex, played an important role.

Both the left and right variants of this brain region were particularly active when a more risk-averse test subject pressed the button to buy stocks

"The anterior insular cortex acts like a stop sign and thus cautions against risky decisions," said Hausler. However, the structure was significantly less active in subjects who had already bought stocks at some point in their lives than in subjects who generally shy away from financial risks.

By contrast, there was only little difference between stock buyers and conventional investors, when their stock trading resulted in substantial profits.

The models calculated by the scientists showed that, in addition to already known economic factors such as income and education, risk optimism and risk tolerance in particular have a major influence on stock purchase decisions.