Given “Expert” Financial Advice, Our Brains Shut Down

I expect one of the shifts in economic theory to come from our current financial mess will be a better understanding of humankind as irrational herd beast. The markets-know-best mentality of the past few decades sent the beast off a cliff.

Wired Science:

A brain-scanning study of people making financial choices suggests that when given expert advice, the decision-making parts of our brains often shut down.

The problem with this, of course, is that the advice may not be good.

“When the expert’s advice made the least sense, that’s where we could see the behavioral effect,” said study co-author Greg Berns, an Emory University neuroscientist. “It’s as if people weren’t using their own internal value mechanisms.”

Berns’ specialty is neuroeconomics, a once-obscure field of research that’s received heightened attention since the global economic slowdown left people at a loss to explain how the market’s invisible hand picked their pockets.

Of course, describing a few behavioral tendencies is no substitute for a detailed analysis of market deregulation, poorly conceived derivative contracts and all the other factors that fueled the slowdown. But studies like Berns’, published Tuesday in Public Library of Science ONE, and another on hormones and day trading (testosterone is good for individual traders, but possibly bad for everyone else), have cast scientific doubt on a central tenet of free-market fundamentalism.

Contrary to neoliberal economic theory, markets are not always driven by individuals acting rationally in their own best interests.