The psychology and neuroscience of financial decision making. (2016)

“New data from a variety of sources (is uncovering) new facts about the cognitive processes that influence financial decision-making.”

Cary Frydman, USC Marshall School of Business, Los Angeles and Colin F. Camerer, Caltech, California

Trends in Cognitive Sciences, August 2016. 20(9), 661-675.

“New data from a variety of sources, including the human brain, corporate conference calls, genetics, and online trading activity, allow researchers to uncover new facts about the cognitive processes that influence financial decision-making.”

The authors “review facts about financial decisions and what cognitive and neural processes influence them.

“Because of cognitive constraints and a low average level of financial literacy, many household decisions violate sound financial principles. Households typically have underdiversified stock holdings and low retirement savings rates.

“Investors overextrapolate from past returns and trade too often.

“Even top corporate managers, who are typically highly educated, make (corporate) decisions that are affected by overconfidence and personal history.

“Many of these behaviors can be explained by well-known principles from cognitive science. A boom in high-quality accumulated evidence – especially how practical, low-cost ‘nudges’ can improve financial decisions – is already giving clear guidance for balanced government regulation.”

Free access to the full paper is available here: The psychology and neuroscience of financial decision making.