In the mind of the market: theory of mind biases value computation during financial bubbles.
The ability to infer intentions of other agents, called theory of mind (ToM), confers strong advantages for individuals in social situations. Here, we show that ToM can also be maladaptive when people interact with complex modern institutions like financial markets. We tested participants who were investing in an experimental bubble market, a situation in which the price of an asset is much higher than its underlying fundamental value. We describe a mechanism by which social signals computed in the dorsomedial prefrontal cortex affect value computations in ventromedial prefrontal cortex, thereby increasing an individual's propensity to 'ride' financial bubbles and lose money. These regions compute a financial metric that signals variations in order flow intensity, prompting inference about other traders' intentions. Our results suggest that incorporating inferences about the intentions of others when making value judgments in a complex financial market could lead to the formation of market bubbles.
Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125, USA; Department of Psychology, Royal Holloway University, London TW20 0EX, UK. Electronic address: benedettodemartino@gmail.com.
Benedetto
B
De Martino
John P
JP
O'Doherty
Debajyoti
D
Ray
Peter
P
Bossaerts
Colin
C
Camerer
D015982:Bias; D001921:Brain / Q000098:blood supply / Q000502:physiology*; D001931:Brain Mapping; D002755:Choice Behavior / Q000502:physiology*; D005260:Female; D006801:Humans; D007091:Image Processing, Computer-Assisted; D007092:Imagination; D008279:Magnetic Resonance Imaging; D008297:Male; D010100:Oxygen; D020414:Risk Sharing, Financial; D012919:Social Behavior; D013334:Students; D056345:Theory of Mind / Q000502:physiology*; D013997:Time Factors; D014495:Universities
D010100:Oxygen