Abstract

We review recent rain-scanning (fMRI) evidence that activity in certain sub-cortical structures of the human brain correlate with changes in expected reward, as well as with risk. Risk is measured by variance of payoff, as in Markowitz' theory. The brain structures form part of the dopamine system. This system had been known to regulate learning of expected rewards. New data show that it is also involved in perception, of expected reward, and of risk. The findings suggest that the brain may perform a higher-dimensional analysis of risky gambles, as in standard portfolio theory, whereby risk and expected reward are considered separately. That is, the human brain appears to literally record the very inputs that have become a defining part of modern finance theory.

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