What Will Neuroscience Teach Us About Financial Decision-Making?

Author of Emotions Revealed: Recognizing Faces and Feelings to Improve Communication and Emotional Life (Henry Holt-2003), Ekman expects "the next big thing" to be the ability to determine truthfulness from changes in voice quality. "The emotions of anger and fear look entirely different on the face, and I'm sure they have a different voice signature too."

New research in social neuroscience is zeroing in on investor attitudes in relation to the tenor of the market. Professors have found that in periods of relative predictability, different parts of the brain are activated as opposed to times of unpredictability.

A predictable environment promotes longer-term rewards, the research suggests. Unpredictability — characterized by volatility, for example — makes investors focus on short-term rewards, says John P. Cacioppo, a social psychology professor at the University of Chicago and director of its Center for Cognitive and Social Neuroscience.

In predictable periods, he says, "investors can push their time perspectives out further and focus on longer-term rewards. But in unpredictable times, they're more interested in short-term" returns.

FAs can also learn much from the way clients describe their financial goals, notes Cacioppo. "If they're stated in a very concrete fashion, that suggests less flexibility in getting where they want to go than if they're stated in a very abstract way."

Brain research is uncovering, too, the neurophysiological character of key emotions and other feelings connected with risk. One of them is hope. It is associated with the part of the brain called the nucleus accumbens, which is the center for lust and desire. Fear — and loss aversion — is linked to the anterior insula (pain and disgust center), according to Hersh Shefrin, a professor of behavioral finance at Santa Clara University.

"If you stimulate the … nucleus accumbens before a financial decision is made," he says, "you'll find that people are prone to be more willing to take risks than otherwise."

Shefrin cites a Washington University study — "Are People More Risk-Taking in the Presence of the Opposite Sex?" — in which subjects were presented with a mix of neutral and sensual photographs. Researchers, he says, found that "when you show guys sexy pictures and ask them to make a financial decision right away, they'll make riskier decisions than if you showed them other kinds of pictures."

A different part of the brain's reward system is the medial prefrontal cortex (MPFC). It is activated, writes Peterson, "by the anticipation of earning money, and…drives pursuit of the…investments that one wants."

How can social neuroscience help FAs resolve investing-strategy conflicts between, say, married clients? Brain imaging has shown that bringing the couple's brains back into synchrony with each other can pave the way to a solution.

"Move away from discussing financial decisions, and put them on the same page by getting them to agree on something entirely different," says Cacioppo. Once the two are in sync, neuro-imagery will show their brains to be in "complementary modes of activation. They'll be empathic with one another — in physical resonance, like two clocks ticking at the same time."

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What does social neuroscience teach us about building client relationships?o People are more willing to work with strangers — i.e., give them money — when the strangers are similar to themselves.o Investors feel more positive and aroused by the potential of a reward than they are when a gain actually occurs.o Neurotic people are more reactive to signs of danger — but therefore are also more vigilant about potential risks.o People with high social intelligence decide if someone is trustworthy faster than people who aren't as socially adept.o Gregarious, extraverted people jump at opportunities.o Depressed people are better at analyzing details.

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What kinds of insight will social neuroscience provide in the decades ahead?As the century continues to unfold, social neuroscience is expected to exert a major impact on our lives — in many ways that we can't even imagine. In fact, writes Richard Restak, professor of neurology at George Washington University Medical Center and author of The Naked Brain: How the Emerging Neurosociety Is Changing How We Live, Work and Love, "we will be encouraged to think of ourselves in terms and concepts drawn from neuroscience."

Some brain doctors anticipate the introduction of drugs that can be directed at different portions of the brain to control, among others, risk-taking attitude.

"Using neuro-imaging," writes neuroscientist Richard L. Peterson, partner in Los Angeles-based Market Psychology Consulting, "the potential for various bad financial decisions can [some day] be diagnosed and corrected."

Professor of behavioral finance Hersh Shefrin, of Santa Clara University, even predicts a flight simulator-like contraption that will help advisory clients experience in advance events that would negatively impact their finances. This means, he says, that advisors, instead of "taking a wild guess with a risk-tolerance questionnaire, will be better able to put together financial plans based on how the investor is actually likely to react."

In contrast to social neuroscience's benefits, however, brain research will doubtlessly be used by some to try to manipulate our minds.

Citing that potential danger, neuropsychiatrist Restak writes that we'll "achieve additional insights into the relationship of the brain to our most intimate and personal thoughts…We can employ this emerging new knowledge about social neuroscience to advance human freedom…or we can allow irresponsible people to use [it] in ways that are not always to our advantage."

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Freelance writer Jane Wollman Rusoff is a Los Angeles-based contributing editor of Research and is the founder of Family Star Productions.