International Law

Can You Beat this Market?

Doug French has an interesting claim Does Neuroscience Support Austrian Theory?

"Dr. Read Montague in his book Why Choose This Book? [has a fascinating account of crashes]

Dr. Montague takes us inside the brain to understand how we make decisions. Montague is no economist. Neuroscience is his beat. Why Choose uses computational neuroscience, an extension of evolutionary biology that studies the actual information processing supported by our brains, to try to figure just why humans act the way they act.

It doesn't take long for Montague to touch on the study of an investment game that he set up with two economists, Kevin McCabe and Colin Camerer, based upon on a similar experiment designed by mathematician Terry Lohrenz. The subjects of the experiment were given $100 to invest, making their decisions against 20 different markets.

Montague and the two economists used "historical market traces and measured brain and behavioral responses to these," writes Montague.

The researchers were especially interested in how their subjects would respond to markets featuring bubbles and crashes using a model of market bubbles that Nobel Laureate Vernon Smith devised.

The subjects' brains were scanned while they created and reacted to market bubbles with their investments. Fifty-two subjects played the investment game in the scanners but had no idea they were playing in actual historical markets.

Two of the markets used in the simulation were particularly brutal to the fifty-two participants; the 1987 stock market crash and the 1929 crash. None of the subjects earned money in the 1929 crash simulation and many lost more than half their portfolio.

"This market," Montague explains, "out of all twenty used, lulled subjects' decision mechanisms into a kind of stupor and then — bang. Goodbye, money."

Hmm, probably a game worth playing just to experience the vicarious regret.

Full post as published by Misleading Advertising Law on February 21, 2008 (boomark / email).