New Economics Papers
on Neuroeconomics
Issue of 2012‒05‒29
five papers chosen by

  1. The Aging Investor: Insights from Neuroeconomics By Peter N. C. Mohr; Hauke R. Heekeren;
  2. The influence of time and money on product evaluations - a neurophysiological analysis By Sebastian Lehmann; Martin Reimann
  3. Decomposing the Tourist’s Satisfaction Gap: The Role of Expectations and Cognitions By Díaz Serrano, Lluís
  4. The Wages of Sinistrality: Handedness, Brain Structure and Human Capital Accumulation By Goodman, Joshua Samuel
  5. A Mind is a Terrible Thing to Change: Confirmation Bias in Financial Markets By Pouget, Sébastien; Villeneuve, Stéphane

  1. By: Peter N. C. Mohr; Hauke R. Heekeren;
    Abstract: Individuals in most industrialized countries have to make investment decisions throughout their adult life span to save for their retirement. These decisions substantially affect their living standards in old age. Research on cognitive aging has already demonstrated several changes in cognitive functions (e.g., processing speed) that likely influence investment decisions. This review brings together research on behavioral and neural aspects of financial decision making and aging to advance knowledge on age-related changes in financial decision making. The dopaminergic system plays a key role in financial decision making, both in financial decisions from description and financial decisions from experience. Importantly, both dopaminergic neuromodulation and financial decision making change during healthy aging. Especially when the parameters of the return distribution have to be learned from experience, older adults show a different and suboptimal choice behavior compared to younger adults. Based on these observations we suggest ways to circumvent the age-related bias in financial decision making to improve older adults’ wealth.
    Keywords: neuroeconomics, neurofinance, aging, neuromodulation, risk-return models, risk, fMRI, decision making under risk
    JEL: D03 D87 G11
    Date: 2012–05
  2. By: Sebastian Lehmann (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Martin Reimann (Department of Psychology/Brain & Creativity Institute, University of Southern California Los Angeles)
    Abstract: "Time is money" is how a common saying goes, reflecting a widespread assumption in many people's everyday life. It seems that money and time are very similar concepts which might even be exchangeable all together. However, the neurophysiological processes underlying the activation of time or money are not yet completely understood. In order to understand in how far and in which dimensions the concept of time versus the concept of money effects human behavior we enquired the neural differences of the time versus money effect. This paper broadens the understanding of both concepts and investigates the posited distinct mindsets of time and money using functional magnetic resonance imaging (fMRI) technology. A sample of 44 righthanded adults has been analyzed. Our data supports the idea of the existence of two distinct mindsets for time and money. However, contrasting both conditions in one general linear model only a few significant differences have been found. The insula seems to be a crucial locus for the neural difference of both mindsets. Higher insula activation in the time condition suggests stronger urge for the product primed with time.
    Keywords: time-versus-money effect, priming, product evaluations, insula, functional magnetic resonance imaging (fMRI), consumer neuroscience, decision neuroscience
    Date: 2012–05
  3. By: Díaz Serrano, Lluís
    Abstract: In this paper we present an empirical methodology that allows the tourist’s satisfaction gap between two destinations to be decomposed into two components. One explains the role of differences in observed characteristics of the tourists and the stay (endowments). The other captures the share of the gap due to differences in the utility that tourists derive from those characteristics (cognitive). To illustrate the use of this method, we employ data coming from a sample of tourists visiting two touristic enclaves in Tarragona (Spain). Our results indicate that the cognitive component explains most of the satisfaction gap. Keywords: Satisfaction, expectations, cognition, touristic destination
    Keywords: Turistes, Consumidors -- Satisfacció, Destinacions turístiques, 338 - Situació econòmica. Política econòmica. Gestió, control i planificació de l'economia. Producció. Serveis. Turisme. Preus,
    Date: 2012
  4. By: Goodman, Joshua Samuel
    Abstract: Left- and right-handed individuals have different brain structures, particularly in relation to language processing. Using five data sets from the US and UK, I show that poor infant health increases the likelihood of a child being left-handed. I argue that handedness can thus be used to explore the long-run impacts of differential brain structure generated in part by poor infant health. Even conditional on infant health and family background, lefties exhibit economically and statistically significant human capital deficits relative to righties. Compared to righties, lefties score a tenth of a standard deviation lower on measures of cognitive skill and, contrary to popular wisdom, are not over-represented at the high end of the distribution. Lefties have more emotional and behavioral problems, have more learning disabilities such as dyslexia, complete less schooling, and work in less cognitively intensive occupations. Differences between left- and right-handed siblings are similar in magnitude. Most strikingly, lefties have six percent lower annual earnings than righties, a gap that can largely be explained by these differences in cognitive skill, disabilities, schooling and occupational choice. Lefties work in more manually intensive occupations than do righties, further suggesting that lefties’ primary labor market disadvantage is cognitive rather than physical. Those likely be left-handed due to genetics show smaller or no deficits relative to righties, suggesting the importance of environmental shocks as the source of disadvantage. Handedness provides parents and schools a costlessly observable characteristic with which to identify young children whose cognitive and behavioral development may warrant additional attention.
    Date: 2012
  5. By: Pouget, Sébastien; Villeneuve, Stéphane
    Abstract: This paper proposes a dynamic model of financial markets where some investors are prone to the confirmation bias. Following insights from the psychological literature, these agents are assumed to amplify signals that are consistent with their prior views. In a model with public information only, this assumption provides a rationale for the volume-based price momentum documented by Lee and Swaminathan (2000). Our results are also consistent with a variety of other empirically documented phenomena such as bubbles, crashes, reversals and excess price volatility and volume. Novel empirical predictions are derived: i) return continuation should be stronger when biased traders' beliefs are more extreme, and ii) return continuation should be stronger after an increase in trading volume. The implications of our model for short-term quantitative investments are twofold: i) optimal trading strategies involve riding bubbles, and that ii) contrarian trading can be optimal in some market circumstances.
    Keywords: financial markets, psychological biases, confirmation bias, momentum, reversal, bubbles, trading strategies
    Date: 2012–03

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