In Second that Emotion, economic commentator James Glassman discusses how several mutual funds are using techniques pioneered by behavioral economists to help take into account emotions in financial markets.
Behavioral economists have shown that, under some circumstances, people aren't rational actors in their economic decision-making; they are influenced heavily by their emotions. So as Glassman put it, "How do you fight emotional, irrational responses to financial stimuli?"
One answer he gives is "mean reversion." But with emerging neurotechnology the answer could be quite different. For instance, traders could be given emotional forecasting feedback and neuroceutical tools to adjust their perception of future events.
Here is a simplistic thought experiment on how neurotechnology might play a role:
1. Reduce overestimation with real-time impact bias feedback: The gap between what we predict and what we ultimately experience is the ''impact bias'' -- ''impact'' meaning the errors we make in estimating both the intensity and duration of our emotions and ''bias'' our tendency to err.
To predict correctly how they will feel about their decision some time after it occurs, people need to know: the acceleration of their initial emotional reaction, the peak level of intensity of their reaction and the rate of deceleration. People almost always overestimate the rate of acceleration, overestimate the peak level of intensity and underestimate the rate of deceleration of the pleasure that their decisions gave them.
As George Lowenstein, an expert in emotional forecasting points out, ''If you had a deep understanding of the impact bias and you acted on it...you would tend to invest your resources in the things that would make you happy." In short, financial traders would perhaps make decisions that were more in-line with longer-term satisfaction and financial returns.
2. Reduce empathy gap by stabilizing emotional states: The "empathy gap" is the difference between how we behave in "hot'' states (those of anxiety, courage, fear, and the like) and ''cold'' states of rational calm. Our empathy gap impacts our thoughts and behaviors to the point where we cannot seem to predict how we will behave in a hot state when we are in a cold state.
Emoticeuticals that would be triggered when a trader was in a particular "hot" state that could remind them of the consequences of making a trade when they are in a particular state. The baseline for the trigger might be a complex of multiple "hot" states that the trader would determine was most appropriate for them based on their trading history and when they have made poor decisions.
Clearly the above example is simplistic. It is a thought experiment on how financial trading might be impacted by neurotechnology. More to follow.