NEUROPHSIOLOGY IN RISK TAKING

Submitted To: Submitted by:

Dr. Anindita Chakravarty Anup Kumar Das
MBA16423007
Roll No: 06
WHAT IT IS ??
• Developments in neuroscience are increasingly drawing attention to the physical
component of risk-taking, rather than seeing it as the product of pure mind.

• John Coates, a research fellow in cognitive and behavioural neuroscience at the

University of Cambridge, told Financial News in an email: "Risk-taking is a
profoundly physical activity. We are taught by economics and finance to think it's
mostly a cognitive activity. But it isn't. Information, volatility, profit & loss, affect our
body as much as our brain.

• "Importantly, the physical changes in our body feed back on the brain and alter the
way we think, the memories we recall, the amount of risk we want to take."
WHY DO WE TAKE RISKS ???
The reasons you might take unhealthy risks, include:
• Peer pressure - It is not uncommon to want to have respect from your peer group or
those whose opinion may be important to you. Engaging in a risky or dangerous activity
or behaviour may be a way for you to feel accepted and part of the group.
• Believing that its a way of proving to yourself or others that you are an adult and that
you are responsible for your own actions.
• Dealing with problems or escaping from unhappy situations or feelings. It may not
always be obvious that you are using the behaviour as a way of managing your problem
or unhappy situation.
• As a form of rebellion against something or someone.
• To get attention or a response from someone.
 WHAT HAPPENS AMONG INDIVIDUALS !!!

• Testosterone levels
It is found that day traders had significantly higher testosterone levels on days when
they made above-average profits. Not only that, looking at testosterone levels in the
morning predicted how much money traders would make in the afternoon.

The biological diversity of the trading floor by employing more women and older men
could improve market stability. Older men are less susceptible to the testosterone
feedback loop, while women produce 10%-20% as much testosterone as men, so they
may be less prone to the winner effect.
BIOLOGY OF RISK TAKING !!!
So how can traders take these biological considerations into account when it comes
to their own performance ???
It advocates physiological monitoring, which would detect when traders have
"succumbed to the siren call of irrational exuberance or the despondency of irrational
pessimism".
• Learning the biology of risk-taking increases self-awareness, and our ability to
control the physical echoes, to maximise performance, just as an athlete would with
the help of a sports physiologist.

• Monitors on the finger or wrist record heart rate, pulse, respiratory cycle and
galvanic skin conductivity, as well as levels of sleep, nutrition and movement.

• Heart-rate variability measures the variation in the time interval between

heartbeats, and how erratic or smooth it is can be a proxy for an emotional state.
 RISK ASSESMENT !!!
• Risk assessment is a step in a risk management procedure. Risk assessment is the
determination of quantitative or qualitative value of risk related to a concrete
situation and a recognized threat (also called hazard).
• Individuals obviously differ in all aspects of behaviour and personality and the
same can be said for propensity of risk-taking behaviours. While some individuals
demonstrate sparse or spontaneous risk-taking behaviours, others continuously
demonstrate consistent risk-taking behaviours.
There are a few different means in use in order to measure someone’s risk-taking
tendencies, three of which are the Betting Dice Test, the Iow Gambling Task and the
Baloon Analog Risk Task.
 BETTING DICE TEST !!!
Betting Dice Test (BDT), which consists of betting on one out of four alternatives that
can result when throwing two dice. The higher the probability of occurrence, the lower
the reward associated. Contrary to the Balloon Analog Risk Task, where the expected
values of the alternatives change throughout the test, the expected values of the
Betting Dice Test options are always the same. It is therefore assumed that participants
who bet on the more probable but less rewarded alternative are making a more
conservative selection than those who place the less probable though more rewarded
bet. Moreover, no feedback is given after each bet. Participants elections are free from
the previous results obtained. The test developed from a risk-return trade-off
framework: Potential return rises with increase in risk, so that low levels of risk are
associated with low potential returns, and high levels of risk are associated with high
potential returns.
LOW GAMBLING TASK !!!
The Iow Gambling Task is a computer-based task in which participants have to
select cards from one out of four decks in order to get as much money as they can;
when the card is selected, the amount won is indicated. The decks differ in the
amount of immediate gain versus the possibility of penalty with larger rewards and
losses in decks A and B than in decks C and D. The optimum results are achieved by
avoiding decks A, B and selecting cards from decks C and D. The expected values of
the four decks are not the same. It is expected that unimpaired people choose
cards from the more “advantageous” decks.
BALOON ANALOGY RISK TASK !!!

The third behavioural measure is the Baloon Analog Risk Task in which participants
pump up an on-screen baloon with the aim of making it as large as possible without
causing it to explode. The baloons have different explosion probabilities from the first
to the 128th pump; as long as it doesn’t explode, the larger the balloon is pumped, the
greater the gain. The Baloon Analog Risk Task can be considered a “pure” measure of
risk propensity as long because it clearly presents a risky situation in which alternatives
have different (uncertain) probabilities and rewards.
THE NEURAL BASIS OF FINANCIAL
RISK TAKING !!!
Abstract
• Investors systematically deviate from rationality when making financial decisions, yet
the mechanisms responsible for these deviations have not been identified. It is
examined whether anticipatory neural activity would predict optimal and suboptimal
choices in a financial decision-making task. We characterized two types of deviations
from the optimal investment strategy of a rational risk-neutral agent as risk-seeking
mistakes and risk-aversion mistakes. Nucleus accumbens activation preceded risky
choices as well as risk-seeking mistakes, while anterior insula activation preceded
riskless choices as well as risk-aversion mistakes. These findings suggest that distinct
neural circuits linked to anticipatory affect promote different types of financial
choices and indicate that excessive activation of these circuits may lead to investing
mistakes. Thus, consideration of anticipatory neural mechanisms may add predictive
power to the rational actor model of economic decision making.