Occipital

pTemporal

Parietal

Central

aTemporal

Frontal

Time Window (ms)

–3.5

3.5

T Values

300 600 900 1200 1500

0

0.05

P Values

300 600 900 1200 1500

ERP  Results:  Choice  Optimality

Neural  Dynamics  of  Decision-­‐Making  in  a  Financial  Trading  TaskAlison Harris1, Cary Frydman2 & Tom Chang2

1 Department of Psychology, Claremont McKenna College, Claremont, CA USA2 Department of Finance and Business Economics, Marshall School of Business, University of Southern California, Los Angeles, CA USA

❖ Disposition effect❖ Sell winning stocks more often than losing stocks❖ Deviation from optimal financial decision-making

❖ Realization Utility theory❖ Pleasure from sale relative to purchase cost (capital gain)❖ It hurts to sell at a loss, but “locking in” a gain is satisfying

❖ When and how does financial decision-making occur in the brain?❖ Value signals related to capital gain❖ Neural correlates of optimal vs. suboptimal trading choice

Introduction

}

Methods❖ N = 60❖ Investing in stock market with stocks A, B, C

❖ Update period: Price change❖ Action period: Buy or sell decision

$80B

BUY?

Action 2

DOWN $5 --> $80B

Don’t own

Update 2

$75A

Cost: $100 SELL?

Action 1

Update 1

UP $15 --> $30C

Purchased: $100

Trial structureTrial structureTrial structureTrial structure

Update2 s

Prep (Fixation)1-2 s

ActionRT (max 3 s)

ITI (Fixation)3 * RT

❖ Procedure❖ 128-channel EEG❖ Could only hold 0 or 1 units of each stock❖ Informed of stock market properties at start of experiment

❖ Good state: p(up) = 0.7, p(down) = 0.3❖ Bad state: p(up) = 0.3, p(down) = 0.7❖ 20% chance of changing from good to bad state or vice versa

❖ Payoff at end of experiment based on stock holdings and sales

Predictions❖ Participants will exhibit behavioral disposition effect (DE)❖ Capital gain (CG) at sell decision correlates with neural value

signal❖ Ventromedial prefrontal cortex (vmPFC)❖ From ~400 ms after stimulus onset❖ Neural sensitivity to CG associated with selling “winners”

❖ Optimal choice requires overcoming realization utility bias❖ Analogous to regulating behavioral/cognitive conflict❖ Anterior cingulate cortex (ACC)

ERP  Results:  Capital  Gain

Behavioral  Results❖ Average DE = 0.07 significantly greater than zero (p = 0.04)❖ Suboptimal behavior compared to “rational” Bayesian agent

-0.7

-0.5

-0.3

-0.1

0.1

0.3

0.5

0.7

Dis

po

siti

on

Eff

ect

Subject

“Rational” DE

0

1250

2500

3750

5000

Held Gains Sold Gains Held Losses Sold Losses

Num

ber

of R

esp

ons

es

OptimalSuboptimalNeutral

❖ EEG data time-locked to Action period onset❖ Subject-level linear regression:

Capital Gain: ysensor,time = β0 + β1CapitalGain + β2BayesianPosterior + ε

99 ms

100 ms

100 ms

+0.5 µV

–

Lateral

Central

OptimalSuboptimal

HoldSell

-0.4 µV

-0.8 µV

0 µV

1.2 µV

Gain Loss

*

❖ EEG data time-locked to Action period onset❖ Paired t test on optimal vs. suboptimal choice

❖ Optimal: hold if bi(good) > 0.5 , sell if bi(good) < 0.5

150 ms

150 msFrontal

100 ms

+1 µV

–1.8 µV

2.1 µVMean Amplitude

<25% Gain 25-50% Gain 50-75% Gain >75% Gain

–3

3

T V

alue

s

150 to 200 ms post-stimulus

400 to 650 ms post-stimulus

450 ms

450 ms

Central

100 ms

+0.5 µV

–0.9 µV

1.3 µVMean Amplitude

350 to 450 ms post-stimulus

-0 µV

-0.8 µV

0 µV

1.2 µV

Gain Loss

❖ Disposition effect exists despite being financially suboptimal❖ Capital gain at sell decision correlates with ERP value signal

❖ Emerges 400-650 ms after stimulus onset❖ Localized to vmPFC❖ Neural CG signal correlates with propensity to sell winners

❖ Optimal choice requires overcoming realization utility bias❖ Neural signals as early as 100-150 ms after stimulus onset❖ Localized to ACC

➡ ERP provides insight into time course of disposition effect➡ Supports role of neural value signals in realization utility bias

Conclusions

Occipital

pTemporal

Parietal

Central

aTemporal

Frontal

Time Window (ms)

–3.5

4

T Values

300 600 900 1200 1500

0

0.05

P Values

300 600 900 1200 1500

100 to 150 ms post-stimulus

Correlating  ERP  with  Behavior

0

0.2

0.4

0.6

0.8

1

-1 -0.5 0 0.5 1

Pro

pen

sity

to S

ell W

inne

rs

Capital Gain β 400-650 ms

r = 0.28p = 0.03

0

0.2

0.4

0.6

0.8

1

-1 -0.5 0 0.5 1

Pro

pen

sity

to S

ell L

ose

rs

Capital Gain β 400-650 ms

r = 0.05p = 0.45

ERP  Source  Reconstruction❖ Distributed source reconstruction in SPM8 (group inversion)

Capital Gain, 400-650 ms post-stimulus

fMRI ❖ Linear ordering of CG quartiles

❖ Localized to vmPFC❖ Consistent with fMRI

(Frydman et al., 2014)F = 150

y = 39

Optimal vs. Suboptimal, 100-150 ms post-stimulus

❖ Optimal > Suboptimal❖ Left dorsal ACC❖ Bilateral precentral gyrus❖ Left anterior insula

❖ Suboptimal > Optimal❖ Genual ACC❖ Right anterior insula❖ Bilateral parietal lobe

5 6–6 –5

T Values

vmPFC

100 ms

+0.5 µV

–

Lateral

Central

Latency 350 ms from TVals

−3.1

−1.6

0

1.6

3.1

350 ms

Mean Amplitude

Mean Amplitude