In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles
Benedetto De Martino, John P O'Doherty, Debajyoti Ray, Peter Bossaerts, Colin Camerer
NEURON | CELL PRESS | Published : 2013
The ability to infer intentions of other agents, called theory of mind (ToM), confers strong advantages for individuals in social situations. Here, we show that ToM can also be maladaptive when people interact with complex modern institutions like financial markets. We tested participants who were investing in an experimental bubble market, a situation in which the price of an asset is much higher than its underlying fundamental value. We describe a mechanism by which social signals computed in the dorsomedial prefrontal cortex affect value computations in ventromedial prefrontal cortex, thereby increasing an individual's propensity to 'ride' financial bubbles and lose money. These regions c..View full abstract
Awarded by NATIONAL INSTITUTE OF MENTAL HEALTH
Thanks to David Porter for sharing the behavioral data, Antonio Rangel for help during the initial design of the experiment, and Jessica Hughes for commenting on the manuscript. Support came from the Sir Henry Wellcome Fellowship (B.D.M.), the Betty and Gordon Moore Foundation (C.F.C., J.O.D., P.B.), and the Lipper Family Foundation (C.F.C.). None of the authors of this manuscript have a financial interest related to this work.