Cary Frydman

MAOA-L carriers are better at making optimal financial decisions under risk

Genes can affect behaviour towards risks through at least two distinct neurocomputational mechanisms: they may affect the value assigned to different risky options, or they may affect the way in which the brain adjudicates between options based on their value. We combined methods from neuroeconomics and behavioural genetics to investigate the impact that the genes encoding for monoamine oxidase-A (MAOA), the serotonin transporter (5-HTT) and the dopamine D4 receptor (DRD4) have on these two computations. Consistent with previous literature, we found that carriers of the MAOA-L polymorphism were more likely to take financial risks. Our computational choice model, rooted in established decision theory, showed that MAOA-L carriers exhibited such behaviour because they are able to make better financial decisions under risk, and not because they are more impulsive. In contrast, we found no behavioural or computational differences among the 5-HTT and DRD4 polymorphisms.

Neural Evidence of Regret and Its Implications for Investor Behavior

We use neural data collected from an experimental asset market to measure regret preferences while subjects trade stocks. When subjects observe a positive return for a stock they chose not to purchase, a regret signal is observed in an area of the brain that is commonly active during reward processing. Subjects are unwilling to repurchase stocks that have recently increased in price, even though this is suboptimal in our experiment. The strength of stock repurchasing mistakes is correlated with the neural measures of regret. Subjects with high rates of repurchasing mistakes also exhibit large disposition effects.

Extrapolative Beliefs in Perceptual and Economic Decisions: Evidence of a Common Mechanism

A critical component of both economic and perceptual decision making under uncertainty is the belief-formation process. However, most research has studied belief formation in economic and perceptual decision making in isolation. One reason for this separate treatment may be the assumption that there are distinct psychological mechanisms that underlie belief formation in economic and perceptual decisions. An alternative theory is that there exists a common mechanism that governs belief formation in both domains. Here, we test this alternative theory by combining a novel computational modeling technique with two well-known experimental paradigms. We estimate a drift-diffusion model (DDM) and provide an analytical method to decode prior beliefs from DDM parameters. Subjects in our experiment exhibit strong extrapolative beliefs in both paradigms. In line with the common mechanism hypothesis, we find that a single computational model explains belief formation in both tasks and that individual differences in b...

Rolling Mental Accounts

When investors sell one asset and quickly buy another (“reinvestment days”), their trades suggest the original mental account is not closed, but is instead rolled into the new asset. Retail investors trading on their own accounts display a rolled disposition effect, selling the new position when its value exceeds the initial investment in the original position. On reinvestment days, these investors display no disposition effect (consistent with no disutility from realizing a loss) and make better selling decisions. Using a laboratory experiment, we show that reinvestment causally reduces the disposition effect and improves trading. Received April 10, 2016; editorial decision January 28, 2017 by Editor Andrew Karolyi.

The Role of Salience and Attention in Choice under Risk: An Experimental Investigation

We conduct two experiments that test a recently proposed theory of context-dependent choice under risk called salience theory. The theory predicts that a decision maker’s attention is drawn to precisely defined salient payoffs, and these payoffs are overweighted in the choice process. In our first experiment, subjects make a series of highly incentivized choices between a risky lottery and a certain option while their eye-movements are recorded. In the second experiment, subjects choose between a risky lottery and a certain option, but we exogenously manipulate the visual salience of the risky lottery. We find three main results. First, the data on lottery choices is broadly consistent with salience theory as risk-taking increases when the upside of the risky lottery becomes more salient. Second, using eye-tracking data, we find that subjects do not pay more attention to the state that is theoretically salient, which is inconsistent with the theory; instead, subjects pay more attention to the risky lottery compared to the certain option when the risky lottery’s upside is salient. Third, risk taking is reduced when a lottery’s downside becomes visually salient. More generally, our results provide evidence that attention is an important and causal factor in determining choice under risk.

Using Response Times to Infer Others’ Beliefs: An Application to Information Cascades

The standard assumption in social learning environments is that agents can only learn from others through choice outcomes. We argue that agents can also infer information from others’ choice processes. We conduct an information-cascade experiment where we manipulate subjects’ ability to observe others’ response times (RTs) as they make publicly observable decisions. We find that RTs contain information that is not contained in choice outcomes and that subjects are naturally able to correctly infer others’ private information from the RTs. Our results suggest that in environments where RTs are publicly available, the information structure may be richer than previously thought.

Relative Wealth Concerns in Portfolio Choice: Neural and Behavioral Evidence

I use neural data collected from an experimental asset market to test the underlying mechanisms that generate peer effects. In a sample of randomly assigned subjects who are given identical information, I find strong causal peer effects in investment decisions. I then use the neural data to construct novel empirical tests that can distinguish between competing preference-based explanations of peer effects. The observed neural activity is most consistent with a preference for social status and relative wealth concerns. The subjects with the strongest neural sensitivity to a peer’s change in wealth exhibit the largest peer effects in their trading behavior.

The Impact of Salience on Investor Behavior: Evidence from a Natural Experiment

We test whether the display of information causally affects investor behavior in a high stakes trading environment. Using investor level brokerage data from China and a natural experiment, we estimate the impact of a shock that increased the salience of a stock’s purchase price, but did not change the investor’s information set. We employ a difference-in-differences approach and find that the salience shock causally increased the disposition effect by 17%. We use microdata to document substantial heterogeneity across investors in the treatment effect. A previously documented trading pattern, the “rank effect,�? explains heterogeneity in the change in the disposition effect.

Representations of Subjective Effort Cost

How effortful an action feels critically shapes everyday decisions. Despite the importance of perceptions of effortfulness for making choices, the behavioral and neural representations of the subjective cost of physical effort are not well understood. We used functional magnetic resonance imaging (fMRI) to monitor brain activity while participants engaged in risky choices for prospective physical effort independent of reward. Behaviorally we found that participants exhibited increasing sensitivity to changes in subjective effort as objective effort levels increased. Moreover, the ventromedial prefrontal cortex (vmPFC) encoded the subjective cost of prospective effort options and integrated these representations to facilitate decisions regarding effort expenditure. These results provide insight into human decision-making by showing how neural representations of feelings of effortfulness engender choices about exertion.The perceived effort level of an action shapes everyday decisions. Despite the importance of these perceptions for decision-making, the behavioral and neural representations of the subjective cost of effort are not well understood. While a number of studies have implicated anterior cingulate cortex (ACC) in decisions about effort/reward trade-offs, none have experimentally isolated effort valuation from reward and choice difficulty, a function that is commonly ascribed to this region. We used functional magnetic resonance imaging (fMRI) to monitor brain activity while human participants engaged in uncertain choices for prospective physical effort. Our task was designed to examine effort-based decision making in the absence of reward and separated from choice difficulty - allowing us to investigate the brain9s role in effort valuation, independent of these other factors. Participants exhibited subjectivity in their decision-making, displaying increased sensitivity to changes in subjective effort as objective effort levels increased. Analysis of blood-oxygenation level dependent (BOLD) activity revealed that the ventromedial prefrontal cortex (vmPFC) encoded the subjective valuation of prospective effort and ACC encoded choice difficulty. These results provide insight into the processes responsible for decision-making regarding effort, dissociating the roles of vmPFC and ACC in prospective valuation of effort and choice difficulty.