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Published September 18, 2013 | Erratum + Supplemental Material + Published
Journal Article Open

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


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.

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.


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).

Attached Files

Published - 1-s2.0-S0896627313005680-main.pdf

Supplemental Material - mmc1.pdf

Erratum - 1-s2.0-S0896627313010362-main.pdf


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August 19, 2023
October 20, 2023