03-25-2009, 02:37 PM
From The Times
March 24, 2009
Mark Henderson, Science Editor
Financial advice can make us take leave of our senses, according to research that shows how the brain sets aside rationality when it gets the benefit of supposedly expert opinion.
When a bank manager or investment adviser recommends a financial decision, the brain tends to abdicate responsibility and defer to their authority with little independent thought, a study has suggested.
Such expert advice suppresses activity in a neural circuit that is critical to sound decision-making and value judgments, scientists in the US have found.
Their results may explain why people are so apt to follow expertsââ¬â¢ recommendations blindly, when a little reflection might be sufficient to suggest an alternative course of action.
People are likely to be especially susceptible to uncritical trust of experts in times of economic uncertainty, such as during the current recession, the scientists said.
ââ¬ÅThis study indicates that the brain relinquishes responsibility when a trusted authority provides expertise,ââ¬Â said Gregory Berns, Professor of Neuroeconomics and Psychiatry at Emory University in Atlanta, who led the research. ââ¬ÅThe problem is that it can work to a personââ¬â¢s detriment if the trusted source turns out to be incompetent or corrupt.ââ¬Â
The research, published in the open-access journal Public Library of Science One, suggests that the workings of the human brain make people inherently vulnerable to confidence tricksters and aggressive hard-sell tactics. This may have contributed to the pensions mis-selling scandal, stock market bubbles and even to the origins of the credit crunch.
Bank executives may have done little to challenge complex derivatives and securities that they did not themselves understand because they deferred to the experts who devised and promoted them.
In the study Professor Bernsââ¬â¢s team asked 24 volunteers to take part in a financial game while their brains were scanned using functional magnetic resonance imaging (fMRI). Each participant was asked to make a series of choices between receiving a guaranteed payment and gambling on a lottery. During some parts of the game the subjects had to make decisions on their own, while in other parts they were advised by an expert economist.
The subjects tended to take the advice, even though it was not always likely to lead to the highest possible earnings. Their brains also showed different patterns of activity when advice was available and when it was not.When participants had to make choices by themselves, they showed high activity in brain areas such as the anterior cingulate cortex and the dorsolateral prefrontal cortex, which are involved in active decision-making and probability calculation.
When economic advice was provided, these same areas showed much lower activity, indicating that the brain was ââ¬Åoffloadingââ¬Â the task of rational evaluation to the expert.
A separate study, published in the journal Proceedings of the National Academy of Sciences, has highlighted another way in which the brain makes irrational financial judgments.
Economists know that most people value gross increases in income more than they do larger increases in buying power. Most people, for example, will choose a 2 per cent wage increase against a background of 5 per cent inflation, over a 2 per cent wage cut while prices are stable, even though the latter is financially preferable.
A team led by Armin Falk and Bernd Weber, of University of Bonn, in Germany, have used fMRI scans to show that different patterns of brain activation may explain this illusion.
Analysis: Don't sack your adviser quite yet
The findings from Emory University hint at what personal finance journalists have known for years: that there are two automatic responses to anything money-related ââ¬â boredom and fear.
Most people cannot wait to unburden themselves of their mind-numbing, terrifying money worries so that they can get on with more pleasant decisions, like what to have for dinner.
But the findings of this study are not a reason to sack your adviser and go on a crash course in accountancy. One very good reason for enlisting the help of an adviser, provided that the person is regulated, qualified and experienced, is that there is a system for redress if he or she fails to explain risk adequately.
Tempting though it may be to throw ourselves at their mercy, advisers are not sages with the power to move markets. They are a useful second opinion. Treat them as anything more and you only have yourself to blame.
Rebecca Oââ¬â¢Connor
http://www.timesonline.co.uk/tol/news/uk...962749.ece
March 24, 2009
Mark Henderson, Science Editor
Financial advice can make us take leave of our senses, according to research that shows how the brain sets aside rationality when it gets the benefit of supposedly expert opinion.
When a bank manager or investment adviser recommends a financial decision, the brain tends to abdicate responsibility and defer to their authority with little independent thought, a study has suggested.
Such expert advice suppresses activity in a neural circuit that is critical to sound decision-making and value judgments, scientists in the US have found.
Their results may explain why people are so apt to follow expertsââ¬â¢ recommendations blindly, when a little reflection might be sufficient to suggest an alternative course of action.
People are likely to be especially susceptible to uncritical trust of experts in times of economic uncertainty, such as during the current recession, the scientists said.
ââ¬ÅThis study indicates that the brain relinquishes responsibility when a trusted authority provides expertise,ââ¬Â said Gregory Berns, Professor of Neuroeconomics and Psychiatry at Emory University in Atlanta, who led the research. ââ¬ÅThe problem is that it can work to a personââ¬â¢s detriment if the trusted source turns out to be incompetent or corrupt.ââ¬Â
The research, published in the open-access journal Public Library of Science One, suggests that the workings of the human brain make people inherently vulnerable to confidence tricksters and aggressive hard-sell tactics. This may have contributed to the pensions mis-selling scandal, stock market bubbles and even to the origins of the credit crunch.
Bank executives may have done little to challenge complex derivatives and securities that they did not themselves understand because they deferred to the experts who devised and promoted them.
In the study Professor Bernsââ¬â¢s team asked 24 volunteers to take part in a financial game while their brains were scanned using functional magnetic resonance imaging (fMRI). Each participant was asked to make a series of choices between receiving a guaranteed payment and gambling on a lottery. During some parts of the game the subjects had to make decisions on their own, while in other parts they were advised by an expert economist.
The subjects tended to take the advice, even though it was not always likely to lead to the highest possible earnings. Their brains also showed different patterns of activity when advice was available and when it was not.When participants had to make choices by themselves, they showed high activity in brain areas such as the anterior cingulate cortex and the dorsolateral prefrontal cortex, which are involved in active decision-making and probability calculation.
When economic advice was provided, these same areas showed much lower activity, indicating that the brain was ââ¬Åoffloadingââ¬Â the task of rational evaluation to the expert.
A separate study, published in the journal Proceedings of the National Academy of Sciences, has highlighted another way in which the brain makes irrational financial judgments.
Economists know that most people value gross increases in income more than they do larger increases in buying power. Most people, for example, will choose a 2 per cent wage increase against a background of 5 per cent inflation, over a 2 per cent wage cut while prices are stable, even though the latter is financially preferable.
A team led by Armin Falk and Bernd Weber, of University of Bonn, in Germany, have used fMRI scans to show that different patterns of brain activation may explain this illusion.
Analysis: Don't sack your adviser quite yet
The findings from Emory University hint at what personal finance journalists have known for years: that there are two automatic responses to anything money-related ââ¬â boredom and fear.
Most people cannot wait to unburden themselves of their mind-numbing, terrifying money worries so that they can get on with more pleasant decisions, like what to have for dinner.
But the findings of this study are not a reason to sack your adviser and go on a crash course in accountancy. One very good reason for enlisting the help of an adviser, provided that the person is regulated, qualified and experienced, is that there is a system for redress if he or she fails to explain risk adequately.
Tempting though it may be to throw ourselves at their mercy, advisers are not sages with the power to move markets. They are a useful second opinion. Treat them as anything more and you only have yourself to blame.
Rebecca Oââ¬â¢Connor
http://www.timesonline.co.uk/tol/news/uk...962749.ece
