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Neuroscience May Help Us Understand Financial Bubbles

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New research published in the journal Neuron suggests that market bubbles are in fact driven by a biological impulse to try to predict how others behave.: "They found two areas of the brain's frontal cortex were particularly active during bubble markets: the area which processes value judgements, and that which looks at social signals and the motives of other people. Increased activity in the former suggests that people are more likely to overvalue assets in a bubble. Activity in the latter area shows participants are highly aware of the behavior of others and are constantly trying to predict their next moves. "In a bubble situation, people start to see the market as a strategic opponent and shift the brain processes they're using to make financial decisions," De Martino said. "They start trying to imagine how the other traders will behave and this leads them to modify their judgement of how valuable the asset is. They become less driven by explicit information, like actual prices, and more focused on how they imagine the market will change.""

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