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Published July 22, 2014 | Published + Supplemental Material
Journal Article Open

Irrational exuberance and neural crash warning signals during endogenous experimental market bubbles


Groups of humans routinely misassign value to complex future events, especially in settings involving the exchange of resources. If properly structured, experimental markets can act as excellent probes of human group-level valuation mechanisms during pathological overvaluations—price bubbles. The connection between the behavioral and neural underpinnings of such phenomena has been absent, in part due to a lack of enabling technology. We used a multisubject functional MRI paradigm to measure neural activity in human subjects participating in experimental asset markets in which endogenous price bubbles formed and crashed. Although many ideas exist about how and why such bubbles may form and how to identify them, our experiment provided a window on the connection between neural responses and behavioral acts (buying and selling) that created the bubbles. We show that aggregate neural activity in the nucleus accumbens (NAcc) tracks the price bubble and that NAcc activity aggregated within a market predicts future price changes and crashes. Furthermore, the lowest-earning subjects express a stronger tendency to buy as a function of measured NAcc activity. Conversely, we report a signal in the anterior insular cortex in the highest earners that precedes the impending price peak, is associated with a higher propensity to sell in high earners, and that may represent a neural early warning signal in these subjects. Such markets could be a model system to understand neural and behavior mechanisms in other settings where emergent group-level activity exhibits mistaken belief or valuation.

Additional Information

© 2014 National Academy of Sciences. Freely available online through the PNAS open access option. Edited by Jose A. Scheinkman, Columbia University, New York, NY, and approved June 2, 2014 (received for review October 8, 2013). Published ahead of print July 7, 2014. We thank Nathan Apple for help implementing the large group experiment across three cities and four sites simultaneously. We also thank Antonio Rangel for contributions to the early stages of this project. This research was supported by National Science Foundation Grant SES-00-99209, the Gordon and Betty Moore Foundation, the Lipper Family Foundation (C.F.C.), National Institutes of Health Grants DA11723 and MH085496 (to P.R.M.), The Kane Family Foundation (P.R.M.), Defense Advanced Research Projects Agency (P.R.M.), and a Wellcome Trust Principal Research Fellowship (to P.R.M.). Author contributions: A.S., T.L., P.R.M., and C.F.C. designed research; A.S. and J.K. performed research; A.S., T.L., and P.R.M. contributed new reagents/analytic tools; A.S. analyzed data; and A.S., T.L., P.R.M., and C.F.C. wrote the paper. The authors declare no conflict of interest. This article is a PNAS Direct Submission. This article contains supporting information online at www.pnas.org/lookup/suppl/doi:10.1073/pnas.1318416111/-/DCSupplemental.

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Published - 10503.full.pdf

Supplemental Material - pnas.1318416111.sapp.pdf


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August 22, 2023
October 26, 2023