Understanding brain activity for better investment decisions

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Securing Investment Returns in the Long Run

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University of Geneva

Securing Investment Returns in the Long Run

550 classificações

Curso 4 de 5 em Specialization Investment Management

In this course, you will learn about the famous dichotomy between active and passive investing, how to appropriately measure and analyze investment performance and what the future trends in the investment management industry are. You will first learn about absolute and relative performance, risk-adjusted returns and how to decompose investment performance. The focus will then shift to the two main categories of investment vehicles, active and passive funds, and what they entail in terms of expected performance. Finally, you will explore the worlds of sustainable finance, neurofinance and fintech, three areas of research that will shape the future of the investment management industry. You will also benefit from the insights of experts from UBS, our corporate partner, on the practical implementation of the various concepts we will develop in this course.

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Future Trends

Welcome to the fourth and last module of the course! This module is dedicated to future trends in investment management that are already starting to change how we think about and apply some of the ideas presented in the specialization. We will start with sustainable investing: defining it, examining its value proposition and see how it can be implemented in the context of a widely diversified portfolio. We will then take a quick look at what neurofinance is and how it can help us make better investment decisions. Finally, we will leave you with some insights as to how fintech (i.e. information technology solutions applied to finance) is likely to shape the future of the investment management industry.

What is Neurofinance?6:04

Understanding brain activity for better investment decisions6:01

Conheça os instrutores

University of Geneva- Tony Berrada
SFI Associate Professor of Finance
Geneva Finance Research Institute
University of Geneva- Ines Chaieb
SFI Associate Professor of Finance
Geneva Finance Research Institute
University of Geneva- Jonas Demaurex
Teaching Assistant
Geneva Finance Research Institute
University of Geneva- Rajna Gibson Brandon
SFI Senior Chaired Professor of Finance and Managing Director of the GFRI
Geneva Finance Research Institute
University of Geneva- Michel Girardin
Lecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
Geneva Finance Research Institute
University of Geneva- Philipp Krueger
SFI Assistant Professor of Finance
Geneva Finance Research Institute
University of Geneva- Kerstin Preuschoff
Associate Professor of Neurofinance and Neuroeconomics
Geneva Finance Research Institute
University of Geneva- Olivier Scaillet
SFI Senior Chaired Professor of Finance and Vice-dean (research) at GSEM
Geneva Finance Research Institute
University of Geneva- Philip Valta
SFI Assistant Professor of Finance
Geneva Finance Research Institute

[MUSIC]

In the previous video, we saw how behavioral studies and

findings can help us understand financial markets and individual transactions.

In this video, we will take this idea one step further by arguing that looking at

the brain may provide even more insights into investor behaviors.

For this we will take a closer look at what happens in the human brain

when we make financial decisions.

The reason we think that this is relevant is because every action we take,

any decision we make is ultimately generated by our brain.

And this brain has evolved for thousands of years throughout which we've we're

doing a lot of things, none of which was trading in financial markets.

So our brains are likely optimized for a very different problem.

So it shouldn't come as a surprise that we make so

many errors when we make financial decisions.

Let's begin with asking a very simple question.

With all this talk about expected returns and

risks, how does the brain process these quantities?

Is there a financial center in the brain that

explicitly processes expected rewards and risks?

Now the way we do this is we actually record people's brain activity.

And one way to do this is by using something that's called FMI,

functional magnetic resonance imaging.

So you may know an MRI machine from the hospital where doctors use it to take

a picture of your brain.

But scientists also use these machines to actually record brain activity.

So what we do is we put people in an MRI machine and

we let them play gambles with real money.

So they experience risks, they experience gains, they experience losses.

And we ask which areas of the brain throughout this are more active.

So which areas of the brain respond to risks or high gains or high losses?

So the next question is are these regions special in any way?

Are they the financial center of our brain?

The answer, not surprisingly is no.

These regions do more than just process financial products.

So let's take a look at this region right here.

It is called the ventral striatum.

And it's strongly activated when we anticipate large gains or

when we receive large gains.

But it's also strongly activated when we receive other forms of rewards such as

food, drink, music, sex, and drugs, basically anything related to reward.

In particular, things related to emotional and social rewards as well.

And something similar is true when we look at the regions that process risks.

They also respond to pain, disgust,

empathy, other negative emotions usually in social and emotional contexts.

So what we have learned is that there is no financial center in the brain.

But when the brain processes expected returns and risks it does so

in regions that also process other things, in particular emotions and

that does explain why when we try to make rational decisions, we are often unable to

do so because other things are interfering such as emotions and feelings.

More importantly, if you were following one of the earlier MOOCs,

you may remember our discussion on general principles of the brain,

one of which was that the brain is constantly trying to make predictions and

fill in information that is not actually there.

And that is another aspect that really hinders our ability to make rational

decisions.

Our brain is constantly trying to uncover patterns even if there are none.

And this is the reason why we often think we see a trend when in fact,

the only, we only see random fluctuations that appear to be a trend.

And when you buy into this supposed trend, you can end up losing a lot of money.

And looking at brain activity helps us understand what's

going on in these situations and it helps us understand what drives our decisions.

Finally, also not surprisingly, when we continue to look at these brain regions,

for instance the region that processes risk, we see that the strengths with which

this region responds to risk depends highly on your own tolerance to risk.

So when you're highly risk tolerant,

this region may not become very active when you're experiencing risk.

But when you're really risk averse, this region may be a lot more active.

So in summary, the brain does not have a unique financial decision-making center.

It processes financial returns and risk in the same way as other returns in risk and

as a result, it consequently integrates our financial decisions with

other things that may be irrelevant to the problem at hand.

As a result of that by studying these phenomena, we can better understand

an investor's decision and help her improve her decision-making in the future.

So you may ask now, can I actually improve investments decisions with this?

And at this point, probably not so much.

What it primarily tell us is that you, or

better your brain, make a lot of assumptions about financial markets,

many of which are wrong and many of which you may even be unaware of.

We learned that your brain can trick you into believing

that you have information that is not actually there.

Nonetheless, both from a scientific and

a practical point of view, this new field of neuro finance has already provided us

with many useful insights about the investor's brain and behavior.

And while we many not yet understand its full potential, it promises to provide

us with many more such insights as we continue this research.

If you're interested in learning more about this type of research and

its implications, you can go online and search for the terms neuro finance and

neuroeconomics and explore.

But remember that these are new areas of research and everything you read

should be evaluated carefully and be taken with a grain of salt.

And this concludes our brief excursion into the world of neuro finance.

I hope you enjoyed these videos.

[MUSIC]

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