On this Rational Pi Day, consider some of our irrational societal behaviors. Begin to take the first steps towards quelling those and taking more rational approaches to the issues that will impact us all.
The most compelling findings regarding financial decision-making are found not in spreadsheets, but in science. A blend of psychology, biology and economics, much of the research on this topic has been around for years.
Neuronal recordings and lesion studies indicate that key aspects of economic decisions take place in the orbitofrontal cortex (OFC). Previous work identified in this area three groups of neurons encoding the offer value, the chosen value and the identity of the chosen good. An important and open question is whether and how decisions could emerge from a neural circuit formed by these three populations. Here we adapted a biophysically realistic neural network previously proposed for perceptual decisions (Wang 2002; Wong and Wang 2006). The domain of economic decisions is significantly broader than that for which the model was originally designed: yet the model performed remarkably well. The input and output nodes of the network were naturally mapped onto two groups of cells in OFC. Surprisingly, the activity of interneurons in the network closely resembled that of the third group of cells, namely chosen value cells. The model reproduced several phenomena related to the neuronal origins of choice variability. It also generated testable predictions on the excitatory/inhibitory nature of different neuronal populations and on their connectivity. Some aspects of the empirical data were not reproduced, but simple extensions of the model could overcome these limitations. These results render a biologically credible model for the neuronal mechanisms of economic decisions. They demonstrate that choices could emerge from the activity of cells in the OFC, suggesting that chosen value cells directly participate in the decision process. Importantly, Wang's model provides a platform to investigate the implications of neuroscience results for economic theory.
The most highly evolved brain region in mammals is the prefrontal cortex, which regulates our thoughts, actions, and emotions through extensive connections with other brain regions. Studies in humans have shown that multiple parts of the prefrontal cortex are activated during memory tasks, but patients with damage to some of these areas do not always have memory problems. As a result, researchers have disputed whether memory deficits are caused by damage to individual brain areas subserving specific cognitive functions or by an interruption in the flow of information among widely distributed areas in the prefrontal cortex.
A recently proposed hypothesis reconciles these views by suggesting that cortical areas form a highly ordered network containing hubs that play a critical role in information processing, such that damage to a hub results in severe cognitive impairment. However, most investigations of network structure have relied on either anatomical studies or functional neuroimaging of spontaneous activity at rest, ignoring brain activity related to specific cognitive tasks.
In a study published this week in PLOS Biology, Yasushi Miyashita of the University of Tokyo School of Medicine and his colleagues used functional magnetic resonance imaging (fMRI) and a novel simulated-lesion method in monkeys to show that virtual damage to a prefrontal cortex hub, which was the most highly interconnected with other brain areas activated during a memory task, was predicted to produce the most severe memory impairment. By contrast, virtual damage to a highly interconnected prefrontal cortex hub that was previously identified in anatomical tracer studies was not predicted to produce severe memory problems. According to the authors, these findings lay the foundation for precisely predicting the behavioral and cognitive impact of injuries or surgical interventions in the human brain.
The work, led by Robert Eres from the University's School of Psychological Sciences, pinpointed correlations between grey matter density and cognitive and affective empathy.
The study looked at whether people who have more brain cells in certain areas of the brain are better at different types of empathy.
"People who are high on affective empathy are often those who get quite fearful when watching a scary movie, or start crying during a sad scene. Those who have high cognitive empathy are those who are more rational, for example a clinical psychologist counselling a client,"
There are literally hundreds of empirical studies and well-thought-out concepts that explain why people do dumb things. But none of this excuses the despicable choices made by psychologists within the APA.
A common interpretation in behavioural finance is that rationality is the result of a pure cognitive process which can be behaviourally biased. In general, the bias has a negative connotation because it produces a distortion in the calculation of an outcome. When a decision-making process is cognitively biased the outcome leads to sub-optimal results or judgement errors. Roughly speaking, the subject might make irrational choices due to faulty reasoning, statistical errors, lack of information, memory errors, and the like. Differently, when the decision is emotionally biased, it means that the cognitive process has been influenced by feelings, affects, moods, and so on (let’s label these states “emotions”). This leads us to irrational decisions or actions. (Pompian 2006, Livet 2010, Mazzoli and Marinelli 2011, Fairchild 2014)
In this interpretation, cognitive and emotional processes are discrete and produced by two different systems: a cognitive and an emotional system. While cognitive biases are influences that affect rationality from within the cognitive system, emotional biases refer to those influences that affect the cognitive system from outside.
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