Courtesy: Medill Reports Chicago
Meet Camelia Kuhnen – neuroeconomist. You may not have heard of her yet, but her work is even more intriguing than her title.
The 31-year-old wunderkind of money and mind is a pioneer in the promising new field of neurofinance – a seemingly odd fusion of economics with neuroscience and psychology. Kuhnen, who grew up in Romania, picked up a PhD in finance from Stanford and became an assistant professor of finance at Northwestern University in 2006.
Her findings aren’t abstract theories that only work in a brain-scanning lab. Her research is providing practical insights to anyone who cares about money and their financial decisions. Kuhnen has shed light on why some people save for retirement and others don’t, how emotional states can influence economic decisions, and why some people consistently make risky financial decisions while others shy toward fiscal conservatism.
Her work may influence perspectives and policies on financial ethics, responsibility, risk management, addiction, pay incentives, genetic screenings and more. Medill News Service sat down with Kuhnen to pick her brain on the fascinating field and where it’s headed.
Medill (M): What is neuroeconomics, or should I say neurofinance?
Camelia Kuhnen (CK): There’s really no difference between neuroeconomics and neurofinance. It’s a field that started maybe seven years ago, and the goal is to put together knowledge from science – psychology, sociology and economics – to understand how people make decisions.
From the point of view of an economist, the field should provide us with is a much better understanding of how we choose the things we choose to do: Why do some people take a lot of risks in financial and other people don’t? Why do some people save very little for retirement and some save a lot more? Why do some people become overconfident when they invest?
These are very complex behaviors that we observe, and the traditional models that people have used in economics to understand behavior can’t really account for what we observe. So now we need to make these models a little more complicated, a little more realistic. To do that, we have a lot to learn from neuroscience and psychology and sociology. So this is why the field was born.
M: How did you become interested in this field?
CK: I was at MIT as an undergrad, and I majored in two things – neuroscience and finance. While I was finishing up at MIT, I was working as a research assistant for a famous professor there in the finance department, Andrew Lo. He was starting to dabble into behavioral finance, sort of the psychology of investing behavior. And that got me interested in thinking, “Can I also mix in neuroscience – literally how the brain works – in finance?”
I moved to Stanford and was doing my PhD in finance, doing very normal finance things. But there was a very interesting person in the psychology department: Brian Knutson, he’s a neuroscientist and one of my most frequent co-authors. Brian was offering a class called Affective Neuroscience, or the neuroscience of emotions. So I took that class and designed an experiment, which Brian and I went on and did, to understand whether brain areas which we know are linked to emotional states are critical for financial decisions. And it turns out they are. It is a paper that is very widely cited now (“The neural basis of financial risk taking,” Neuron, Sept. 2005).
M: And then what?
CK: I finished my PhD in ’06 and moved on to Northwestern, but Brian and I continue to work together. We have several more papers – they’re all in this area of neurofinance and basically about how emotions change financial decisions. And at the same time, I’m continuing to work on more traditional finance topics, too, because I like both areas quite a bit. I know they’re very different, but I just like them both. I think I’d get a little bored if I had to stick to just one. I’m having way more fun this way.
M: What else do you do for fun?
CK: I love tennis, hiking, and skiing. And ballroom dancing. [For reading] I really like Steinbeck and Wallace Stegner.
M: What topics interest you in traditional finance?
CK: I have studied compensation schemes and pay incentives. And I did some work on CEO compensation, and why it is the way it is. In that particular paper, we show that public opinion seems to matter. Companies do react to public opinion. People are different in how averse they are to income inequality.
The newer things that I’m working on are about how workers and firms get matched with each other and how they decide who’s going to work for whom. The goal is to make sure the matches are efficient and make sense with people’s abilities. You want to have the right people in the right jobs.
M: What’s another example of your neurofinance work?
CK: We knew from prior work, some of it being mine, that areas in the brain which use dopamine and serotonin are important for how much financial risk you take. And so the question was, do genes that regulate these two chemicals, can they also explain how much financial risk people are willing to take?
We looked at two genes, one that regulates dopamine and one that regulates serotonin. We knew from other work that a specific variant of the dopamine gene is particularly prevalent among people who are pathological gamblers. And we knew there was one variant of this serotonin gene which is prevalent among individuals anxiety problems, which is like an extreme form of being very risk averse.
We then had people play an investment game for real money. It was a stylized setting for basically how you’d invest in your day-to-day life: How much of your paycheck do you want to put in your bank account, a safe investment, and how much do you want to park in those stocks, a bigger risk. Based on their test, you can infer how risk averse or risk seeking people are.
We found exactly what we expected: If you had the variant of the dopamine gene that is prevalent in pathological gamblers, you tended to put more money in the risky asset. If you had the version of the serotonin gene that you see more in those that have anxiety disorders, you tend to put less money in the risky asset and more money in the safe asset.
M: Which versions of the dopamine and serotonin genes do you have?
CK: I’m not going to say. I know which ones I have, though. I was surprised.
M: Does all of this really translate to real life?
CK: I’m happy to say that it translates quite well in the real domain, and I’m basing this on some recent work I’ve done for two papers. In both of these papers, we show that there is a clear link between the performance of individuals in our lab experiments – these financial investment tasks – and how well off they are in real life.
It turns out if you just have people do a survey of how much their assets are worth, and a similar scale for liabilities and debt, they will actually give you answers that are very consistent with their credit report. It’s nice to know that people actually answer these surveys truthfully.
So the answer is yes: We can extend what we’ve found to real-life behavior, and there is what we call external validity to these studies.
M: What’s the future of neurofinance?
CK: I think we still have so much to learn about how people learn in financial markets and how they make decisions. It’s going be a busy 5 years, at least.
The goal is to get a relatively simple and manageable model of how people behave that’s based on how the brain really operates and that economists can use. Hopefully it will allow us to predict behavior that we just can’t make sense of using the models we’ve had for 50 years: Everybody’s rational, nobody makes any mistakes.
Based on all of this research, what’s your best financial advice for people?
Invest in a diversified portfolio, pick low-cost index funds, and do not pick stocks. You don’t know any more than the market does. Leave the stock-picking for professionals.
M: So which one is better – neuroscience or finance?
CK: (laughs) I love this work. I love both the corporate finance work and the neuroeconomics work, I think they’re both very useful for us as people to understand. On one hand, we’re talking about incentives and how we should structure contracts to make people do the right thing, on the other hand we’re talking about how the brain understands information about financial concepts and how we make decisions. I think they’re both very important questions, and I’m excited to work on them. And it’s just fun.
- Daniel Peake
