| Abstract: |
We use measures of neural activity provided by functional magnetic resonance
imaging (fMRI) to test the "realization utility" theory of investor behavior,
which posits that people derive utility directly from the act of realizing
gains and losses. Subjects traded stocks in an experimental market while we
measured their brain activity. We find that all subjects exhibit a strong
disposition effect in their trading, even though it is suboptimal. Consistent
with the realization utility explanation for this behavior, we find that
activity in the ventromedial prefrontal cortex, an area known to encode the
value of options during choices, correlates with the capital gains of
potential trades; that the neural measures of realization utility correlate
across subjects with their individual tendency to exhibit a disposition
effect; and that activity in the ventral striatum, an area known to encode
information about changes in the present value of experienced utility,
exhibits a positive response when subjects realize capital gains. These
results provide support for the realization utility model and, more generally,
demonstrate how neural data can be helpful in testing models of investor
behavior. |