What do sex, drugs and trading stocks have in common?
According to an article written by Adam Levy of Bloomberg that is currently circulating around the world's newspapers, quite a bit.
Late at night, in a basement laboratory at Stanford University, Brian Knutson made a startling discovery: Our brains lust after money, just like they crave sex....
The pleasure of orgasm, the high from cocaine, the rush of buying Google Inc. at $450 a share -- the same neural network governs all three, Knutson, 38, concluded. What's more, our primal pleasure circuits can, and often do, override our seat of reason, the brain's frontal cortex, the professor says. In other words, stocks, like sex, sometimes drive us crazy.
Knutson says he knows how heretical his findings are. Wall Street is dedicated to the principle that when it comes to money, logic prevails, that intellect matters in investing. The idea is enshrined in the economic theory of rational expectations, for which Robert Lucas won the Nobel Memorial Prize in Economic Sciences in 1995.
The story continues...
The question that keeps nagging Knutson is this: Why do some traders get rich while others walk away losers? The answer, he says, may lie somewhere in 60,000 miles of neural wiring inside our brains.
The results of the Stanford study, published in the September issue of Neuron magazine, have caused a stir among the small group of neuroscientists and psychologists who are mapping the human brain in hopes of understanding investor behavior.
This controversial field, called neurofinance, may represent the next great frontier on Wall Street, says Daniel Kahneman, who won the 2002 Nobel Prize in economics for his pioneering work in behavioral finance, which fuses classical economic theory and studies of human psychology.
"The brain scientists are the wave of the future in the financial world," Kahneman, 71, says. "If you seek to maximize understanding, whether you're in academia or in the investment community, you'd better pay very serious attention to them."
To proponents such as Kahneman, the potential of neurofinance seems virtually limitless.
One day, brain science may help money managers spot shifts in investor sentiment, says David Darst, chief investment strategist for the $700 billion individual investor group at New York-based Morgan Stanley. Armed with brain scans, psychotherapists may be able to hone traders' natural impulses of fear and greed.
Neuroscientists may even develop psychoactive drugs, or neuroceuticals, that make people better, more-profitable traders, Knutson and other psychologists say. Look at Prozac. In the space of a few years, Prozac and other drugs have not only revolutionized the treatment of depression but also profoundly changed the way we view the mind. People recognize that chemistry drives their brains, moods and behavior -- and that chemistry can change them.
Similar drugs, ones that improve a trader's decision making by 20 percent to 30 percent, may be just a few years away, says Zack Lynch, managing director of NeuroInsights, a San Francisco-based consulting firm that tracks the $100 billion neurotechnology industry. If these neuroceuticals work, they could rock Wall Street.
"The whole investment community will be scrambling to get these things," Lynch says.
So far, the hopes and claims of neurofinance have far outpaced its science. Few investment professionals have even heard of the field. Many who have dismiss it as hokum.
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So here is my correction.
As I have written here on Brain Waves in the past
and said in previous interviews, while I do believe we are on the cusp of a new wave of financial trading systems that leverage neurotechnology
, I don't just mean highly efficacious and safe neuropharmaceuticals that reduce the anxiety behind trading jitters. More accurately, I believe that the real breakthrough will come from real-time brain scanning and neurofeedback software solutions that correlate previous brain states and trading success to give the trader a predictive capacity based upon their continuously shifting neurobiology. Think of your brain as a market of neurons matched up with the rest of the market economy. When the internal market matches up with external market you have a more profitable solution. Anyone want to raise ten million to test out my more detailed concept?