Brain Waves

Confidence is often considered a nebulous but crucial aspect of the functioning of markets, particularly financial markets. Feeling is another such concept. Considering financial markets as many neural networks interacting, confidence could be thought of as the emotional state in which they are operating, and feeling as the intuitive grab at what myriad inter-relating factors, too complex in their diversity of level, detail, and certainty to be open to formal, superficial analysis, are presenting every moment.

Advances in neural imaging have demonstrated the profound effects emotional state can have upon intuitive understanding and expressed preferences. Confidence leads to different behaviours from those generated by its absence, depression. Operating with depressed emotions alters the 'grab' of understanding offered by feeling. And actions then ensue that reinforce the pattern.

Most economic analysis treats risk preferences, time preferences and social preferences as separate kinds of preferences, but what if all three share common neural circuitry for controlling automatic emotional impulses - fear, temptation , and selfishness respectively, - by integrating all the costs and benefits of choices.

Standard analysis in game theory assumes players are in equilibrium; yet one study showed the more skilled using different parts of the brain in making choices while the less skilled showed brain activity elsewhere as if strategic uncertainty was causing the feeling of discomfort.

The social neuroeconomists Fehr and Camerer posit that eventually there might be a biological basis 'for a mathematical characterization of social exchange that is rooted in neural details but can also make predictions about activity in strategic interaction and market trading ... 'and, they add darkly, '...about how behaviour can change when causally manipulated by pharmacology, TMS, and other tools .'