The Neuroscience of Price Bubbles


In 1936, John Maynard Keynes famously wrote of the “animal spirits” that tend to override rational decision-making in economics. “Our decisions to do something positive,” Keynes wrote, “can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

Nearly eighty years later, a pair of researchers from UC Berkeley's Goldman School of Public Policy —John Haracz and Daniel Acland—are working to better understand the nature of “animal spirits,” including by using neuroscientific methods to examine just what happens in the brain when "animal" enthusiasm overrides purely rational decision-making.

“The idea," explains Acland, "is to think about ways to identify irrational or problematic behavior on the part of investors in financial markets by following the activity in their brain. It's using neuroimaging technology as a way to possibly be able to predict in real time when a financial market is heating up too much, or when it’s about to pop and cause an economic crisis.”

In Spring 2015, Social Science Matrix funded a Prospecting Seminar entitled “Neuroeconomics Interventions to Reduce asset-Price Bubbles Associated with Animal Spirits,” which brought together researchers from economics, psychology, neuroscience, as well as industrial engineering and operations research, to examine and remedy potentially under-recognized causes of asset-price bubbles.

“We’re attempting to get back to allowing ourselves to think about, what do we really know about how we as human beings make decisions?" Acland says. "The neuroscience takes it to the next level. We know where [in the brain] the animal spirit lives…. The ultimate goal of the seminar would be to develop grant proposals to fund the designed lab and field experiments."

The two researchers met in a previous Matrix seminar, focused on Behavior Change and Measurement. They are producing a working paper and have submitted a paper to the Human Frontier Science Program.

“Ideas that were discussed and initiated here are likely to evolve into research collaborations [in other parts of the world],” says Acland, noting that the seminar has had “virtual” attendees based in remote locations such as Atlanta, Algeria, and Norway. “This is an inherently interdisciplinary process. No one in neuroscience is going to understand financial markets well enough—and vice-versa. We don’t have any neuroscientists in the School of Public Policy. We would not have done this seminar without support from Matrix.”

Photo Credit: FMRI BOLD activation in an emotional Stroop task by Shima Ovaysikia, Khalid A. Tahir, Jason L. Chan and Joseph F. X. DeSouza