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In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles

De Martino, Benedetto and O'Doherty, John P. and Ray, Debajyoti and Bossaerts, Peter and Camerer, Colin (2013) In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles. Neuron, 79 (6). pp. 1222-1231. ISSN 0896-6273. PMCID PMC3781325; PMC4081570.

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The ability to infer intentions of other agents, called theory of mind (ToM), confers strong advantages for individuals in social situations. Here, we show that ToM can also be maladaptive when people interact with complex modern institutions like financial markets. We tested participants who were investing in an experimental bubble market, a situation in which the price of an asset is much higher than its underlying fundamental value. We describe a mechanism by which social signals computed in the dorsomedial prefrontal cortex affect value computations in ventromedial prefrontal cortex, thereby increasing an individual’s propensity to ‘ride’ financial bubbles and lose money. These regions compute a financial metric that signals variations in order flow intensity, prompting inference about other traders’ intentions. Our results suggest that incorporating inferences about the intentions of others when making value judgments in a complex financial market could lead to the formation of market bubbles.

Item Type:Article
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URLURL TypeDescription CentralArticle DOIErratum CentralErratum
O'Doherty, John P.0000-0003-0016-3531
Bossaerts, Peter0000-0003-2308-2603
Camerer, Colin0000-0003-4049-1871
Additional Information:© 2014 Elsevier B.V. Accepted: July 1, 2013; published: September 18, 2013. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Thanks to David Porter for sharing the behavioral data, Antonio Rangel for help during the initial design of the experiment, and Jessica Hughes for commenting on the manuscript. Support came from the Sir Henry Wellcome Fellowship (B.D.M.), the Betty and Gordon Moore Foundation (C.F.C., J.O.D., P.B.), and the Lipper Family Foundation (C.F.C.). None of the authors of this manuscript have a financial interest related to this work.
Errata:On page 1226, Equation 1 contained an error. In the originally published version of this article, x_i was added to 3 and the result was divided by 8. Instead, x_i should be added to 3/8. The equation has been corrected online and is shown here: y_i = (x_i+⅜)^(1/2).
Funding AgencyGrant Number
Sir Henry Wellcome FellowshipUNSPECIFIED
Gordon and Betty Moore FoundationUNSPECIFIED
Lipper Family FoundationUNSPECIFIED
Issue or Number:6
PubMed Central ID:PMC3781325; PMC4081570
Record Number:CaltechAUTHORS:20140228-141511496
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Official Citation:De Martino, B., O’Doherty, John P., Ray, D., Bossaerts, P., & Camerer, C. (2013). In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles. Neuron, 79(6), 1222-1231. doi:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:44072
Deposited By: Jason Perez
Deposited On:28 Feb 2014 23:15
Last Modified:09 Mar 2020 13:19

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