I saw an article on Bloomberg Marketplace about mapping the mind of a trader.
Brian Knudson, a neuroscientist. at Stanford found that Google at $450/share, cocaine, and orgasms all share the same neurological pathways.He wanted to answer the question: Why are some traders rich and others not? Ways that traders typically fail to get the returns that they desire is that they follow the herd, trade excessively and react too slowly to unexpected news. These are not problems in financial strategy but cognitive problems: not trading but problems in executive functioning of the brain.
So Knudson started to do brain scans of traders.
In the future, Brain Scans can help understand shifts in investment sentiment according to David Darst, chief investment strategist Morgan Stanley.
Wall Street is already looking at various ways to enhance cognitive performance of its traders: Neurocitricals/Cognictricals, Brain Fitness Gyms, Neurofeedback and biofeedback
George Soros also found that the problems in the market is reflexivity -- markets can’t discount future events correctly because they actually help shape them. Consider the Nasdaq Stock Market boom in the late 90’s.
Remember, Bernie Maddoff suffered from Brain Lesions. Maybe the late financial crisis was really a neurological problem. I am not trying to make light of Madoff’s neurology but his neurological problems might have had an impact on his assessment of risk. More on this interesting intersection of neuroscience, finance, and criminal responsibility later.