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Financial Neurology: Yeah, It’s a Thing Now
Since finance plays such a vital role in our daily lives, and that humanity has spent an eternity perfecting its ability to measure and analyze even miniscule variations in a person’s financial behaviors, when someone is experiencing a malady of the brain the earliest and most accurate indications that something has changed is often expressed through their finances. In fact, whether or not a person is having financial troubles is typically a consideration when making a diagnosis, though it has yet been overlooked in the medical community that the exact nature of the financial problems being exhibited may be even more useful in diagnosis.
The US National Institute on Aging states that, “Over time, people with Alzheimer’s disease lose their capacity to perform the financial tasks of daily living and to manage their financial affairs. In fact, this may be the first noticeable sign of the disease and an early indication that a person is losing the ability to live independently. Research funded in part by the National Institute on Aging (NIA) has shown that Alzheimer’s-induced decline in financial skills occurs early and can progress rapidly. Early in the disease process, people with the disease may be able to perform basic tasks such as bill paying or counting change. However, they are likely to have problems with more complicated tasks such as reconciling a checkbook and bank statement, preparing a tax return, or making wise investment decisions. As Alzheimer’s disease progresses, all of these abilities gradually are lost, with the more complex skills disappearing first.”
Although more complex behaviors will be the first the show signs, it is not until a person is incapable of performing even the most basic financial tasks that their families will tend to insist upon seeing a specialist for diagnosis. Despite that, there appears to be a clear progression in the decline of financial cognition. Work by Al Hazzouri et al (2014) and others emphasizes the use of tests of a narrow range of financial performance to track cognitive decline in existing Alzheimer’s patients.
Bipolar disorder is excellent as an example of the efficacy of using financial behaviors to diagnose neurological conditions because the extreme differences in emotional states associated with depressive or manic episodes typically occur in a cycle predictable by duration of time which would correlate perfectly with their financial behaviors. The diagnosis would simply be one of exceeding a statistical threshold of volatility in one’s financial behavior. According to the Mayo Clinic, these financial behaviors include:
Manic: Increased Spending, Increased Investing Risk, Increased Debt, Excessive Workloads, etc.
Depressive: Late Bill Payments, Unpaid Debt, Inconsistent Income, Safe-Haven Investing, etc.
Not only do these cycles allow for reliable diagnosis, if an individual with bipolar disorder is taking a specific medication and the degree of financial volatility they exhibit reduces, then the benefits of that medication can be measured in a dramatically improved manner compared to qualitative observational analysis and patients self-reporting their symptoms. This demonstrates that financial neurology is beneficial both in diagnosis and in testing treatment efficacy. It all comes-down to the algorithm below:
Each person’s financial behavior is unique, so it has to start by looking at the financial behavior of individuals over time. Within the vast number of financial behaviors everyone exhibits, you are looking for statistically significant levels of volatility, deviations from what is normal for that person, any unusual autocorrelative patterns, and so forth. It may be a single behavior or some combination of different behaviors. If someone with a neurological diagnosis does exhibit financial behaviors which are odd for that individual leading-up to their diagnosis and afterward, then it comes time to compare that particular oddity with other people that have the same diagnosis. If that odd behavior is consistent between everyone who has been diagnosed with the same condition then it becomes possible to perform diagnosis and treatment efficacy testing using the financial behaviors in question
Even more profoundly, this method allows us to map and identify the functions of the brain. In the 1970s Kahneman and Tversky identified consistently anomalous behaviors in risk decisions based on the presentation of information, proving for the first time that the presentation of information actually matters more than the information being presented when making decisions of risk and reward. Then in 2005 Gonzalez et al. recreated the experiments performed by Kahneman and Tversky while placing participants under an fMRI. By doing this they identified a neurological basis for the phenomenon.
It came as no surprise that the frontal lobe (decision making) and parietal lobe (information processing) were activated and it was enough that they were able to specifically identify which parts of the brain were associated with assessments of risk or reward. The authors of the 2005 study understated the implications of their findings, however. Not only did they fail to mention the potential for these findings to create the foundations for the clinical application of financial neurology, but they failed to report the fact that their study participants showed significantly increased activity in the occipital lobe when assessing potential rewards but not potential risk illustrating previously unknown functions of occipital lobe. That is where the bottom half of the algorithm comes into play. Once a specific investing behavior has been identified as being definitely associated with a specific mental disorder, then it becomes possible to scan the brain activity of people with that disorder during financial simulations which will illustrate exactly what areas of the brain are being activated, helping identify the physiological cause of the disorder and improving our ability to prevent, treat, provide coping mechanisms, or even cure it.
So, when we are talking about common conditions like Parkinson’s disease, having methods of financial diagnosis is extremely beneficial. In 2013, Santangelo et al. performed a meta-study which showed that the onset of Parkinson’s disease caused increased risky behavior, most commonly via gambling. Those being treated with certain drugs are especially subject to increases in risky behavior, as these individuals had lower regulation in the frontostriatal and fronto-subcortical areas of the brain. That is completely consistent with Gonzalez et al in 2005, which demonstrated the frontal lobe was most strongly associated with assessment of risk when making decisions.
Michael Taillard is a private economic consultant, emphasizing applied strategy and quantitative, behavioral research. He has worked with private companies from all around the world, federal and local government and political organizations, international nonprofits, and a variety of media outlets. He has taught at universities since 2002, and currently holds adjunct status in the graduate schools at Central Michigan University, as well as Bellevue University.
About Mr. Taillard’s recently published book:
Market Insanity: A Brief Guide to Diagnosing the Madness in the Stock Market is an engaging and accessible primer which applies modern behavioral finance to equity markets. It helps readers understand how logical investment decisions can be betrayed by what Taillard calls “the insanity,” all those behavioral quirks which cause us to achieve less than optimal utility.
- Provides detailed and accurate descriptions of the most relevant behavioral anomalies for finance
- Entertainingly written by a veteran consultant with 15+ years experience helping companies explain anomalous finance behavior in non-economic language
- Shows how educated finance professionals can use behavioral insights to help build finance solutions
- Addresses the implications for equity markets in deviations from rationality paradigms
- Draws on a vast range of literature in explaining anomalous behavior, including economic psychology, economic psychology, evolutionary psychology, anthropology and animal behavior
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