DRU: How Asset Markets Assist Complex Problem Solving: Identifying The Cues Through Neurocorrelates

California Institute Of Technology, Pasadena CA

Investigators

Abstract

Financial markets have long been known to play a crucial role in societal re-allocation and diffusion of risk. Recently, financial markets have been observed contributing to social cognition as well. Information is transmitted, problem solving is influenced, and individual inference is affected. The mechanics by which financial markets contribute to social cognition are not well understood. Neoclassical economic theory assumes that market participants can rationally infer information from others through transaction prices. But the very rationality on which such inference is based should make market participants wary of trading. Unfortunately, if there is no trade, there are no transaction prices, and hence, nothing is revealed. Social cognition is impossible. People trade -- in fact they trade a lot -- but we do not know why. Correlation analysis of order and trade flows and subsequent actions has not provided much insight. Nor have surveys helped much, suggesting that actions may be largely sub-conscious. If so, direct measurement of sub-conscious changes in perceived risk and reward may be a necessary first step towards resolving the trading puzzle and eventually understanding the role of asset markets in social cognition. Recently, scientists have discovered how changes in expected reward and risk induces specific responses in certain sub-cortical parts of the brain. The PIs plan to reverse this approach, exposing subjects to market activity while monitoring brain activity. The goal is to detect features in order and trade flows that trigger changes in perceived risk and reward as reflected in brain activity. The approach borrows from the neuroscience of vision, where scientists have successfully been able to identify the sources of changes in visual perception even in environments as complex as full-feature movies.