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How Can Neuroscience Aid Our Understanding of Risk?

How Can Neuroscience Aid Our Understanding of Risk?
"""Why are some people more likely than others to expose themselves to risk? Why are some people so fearful of taking risks? What is the average person's reaction to risk, and why?

As neuroscience reveals more about the workings of the brain and how we make decisions, these are questions on the minds of many a business leader, particularly (but not exclusively) those in the financial and insurance markets.

For starters, if we could all successfully respond to risk, everyone would be able to retire with enough money and there would be fewer accidents. The world would be a much more stable place if everyone managed risk flawlessly, but we all know that isn't the case.

Models of early risk

The first models to look at risk behavior were based on the rather limited theory of 'expected utility,' which states that people value a possible outcome by multiplying the probability of something happening by the amount they would like it to happen.

However, in practice, this theory was found wanting. As a result, Daniel Kahneman's development of prospect theory helped him win the Nobel Prize. It proposed that people assess outcomes in relation to a reference point. These reference points, however, are difficult to define and can shift unexpectedly.

While other models have attempted to advance the ""science of risk,"" most have failed to answer the question of how people actually make decisions and form their vision of the future. Often, economists expected rational, predictable, logical processes to drive decision-making; cognitive biases and emotion play a much larger role than previously suspected.

Though these cognitive biases and emotional triggers are difficult to predict, neuroscience has the potential to expand our understanding of risk and decision-making.

Neuroscience's Potential

The world is volatile and uncertain. It is not surprising, then, that there are no categorical ""rules"" that we can apply to people's reactions to risk.

However, since the widespread use of functional magnetic imaging, the number of studies on the workings of the brain has increased dramatically. There is a lot of opportunity to learn more.

For example, researchers at Stanford University discovered that when a safe option is chosen over a risky one, a group of neurons light up; these neurons may also be found in the human brain, revealing important information about risk avoidance.

Consider studying the brains of stock market traders as they make decisions based on their daily returns - what happens when they make large losses or gains? What effect does this have on their decision-making? What social cues and biases are at work as risky behavior spreads through the market? Better understanding of risk behaviour can potentially help us prevent stock market 'bubbles' and 'bursts' in the future.

Such research is already underway in neuroscience labs, and we can expect more in the near future as major financial institutions and government regulators become more interested."""
 

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"How Can Neuroscience Aid Our Understanding of Risk?" was written by Mark under the Finance category. It has been read 115 times and generated 0 comments. The article was created on and updated on 13 January 2023.
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