A Neuroscience Perspective on the Financial Crises

Andrew Lo recently posted his paper “Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective” on SSRN.  Here’s the abstract.

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Historical accounts of financial crises suggest that fear and greed are the common denominators of these disruptive events: periods of unchecked greed eventually lead to excessive leverage and unsustainable asset-price levels, and the inevitable collapse results in unbridled fear, which must subside before any recovery is possible. The cognitive neurosciences may provide some new insights into this boom/bust pattern through a deeper understanding of the dynamics of emotion and human behavior. In this chapter, I describe some recent research from the neurosciences literature on fear and reward learning, mirror neurons, theory of mind, and the link between emotion and rational behavior. By exploring the neuroscientific basis of cognition and behavior, we may be able to identify more fundamental drivers of financial crises, and improve our models and methods for dealing with them.

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Download the paper for free here.

Related Situationist posts:

• The Situation of the 2008 Economic Crisis,
• The Deeply Captured Situation of the Economic Crisis,
• David Eagleman on the Brain and the Law
• The Neuro-Situation of Shopping Choices
• Interview with Professor Joshua Greene, and
  
• The Interior Situation of Honesty (and Dishonesty).