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What Will Neuroscience Teach Us About Financial Decision-Making?

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Well, there is one, or something quite similar. What’s more, we all produce it — right in our own brains.

Oxytocin, a feel-good hormone that is secreted during sex and also helps moms and babies bond, is released at high levels as well when you feel that what you’re saying (the client) is resonating with the listener (the advisor). That feeling promotes trust.

In fact, oxytocin has been dubbed the “trust hormone” by researchers delving into the emerging, fascinating field of social neuroscience.

In its infancy, this discipline studies the human brain to reveal which specific parts get fired up during our numerous, diverse interactions with others. Social neuroscience’s basic premise is that the brain has been designed to connect with other brains.

Research revelations are already finding application in futuristic marketing and advertising plans. But here, as in other fields, a potential for dangerous mind manipulation raises questions.

However, social neuroscience, combined with insights from behavioral finance and psychology, can provide valuable information to guide financial advisors in finding out what makes clients tick. In order to serve their total financial needs, it’s essential, of course, for FAs to know as much as they can about clients’ lives.

“Social neuroscience is a myth-busting device that helps sort out the common sense we thought was true and that is true, from the common sense we thought was true but that has no basis,” says psychiatrist Richard L. Peterson, a neuroscientist and partner in Market Psychology Consulting, a Los Angeles-based company that trains financial advisors.

Social neuroscientists study brain scans — typically functional magnetic resonance images (fMRI) — that measure brain activity during short time spans. Neuro-imaging technology can even show which parts of the brain influence financial decision-making. Under certain circumstances, for example, super-activity in the fear-processing area known as the amygdala suggests a high degree of risk aversion.

“These would be fearful, anxious-type people,” notes neuropsychiatrist Richard Restak, clinical professor of neurology at George Washington University Medical Center and author of The Naked Brain: How the Emerging Neurosociety Is Changing How We Live, Work, and Love (Harmony Books-2006).

In one experiment into how oxytocin influences financial decisions and trust, students were given $10 each and received either synthetic oxytocin, via nasal spray, or a placebo. They then played a special computer game in which subjects who acted as “investors” chose whether or not to send money to their partners. The recipients had to decide whether to give some of the money back to the investors or to keep everything.

Scientists found that investors who inhaled the synthetic oxytocin were considerably more trusting: They invested 17 percent more than the investors who sniffed the placebo.

As related to oxytocin release, brain doctors are also busy studying issues of empathy and rapport. Indeed, at this early stage, perhaps the best way social neuroscience research can help financial advisors is in demonstrating why it’s important for them to empathize with clients.

Empathy is the ability to put yourself in someone else’s shoes and share in their emotion as if you were experiencing it yourself. FAs who are deeply empathic excel in encouraging clients to disclose critical personal and financial information.

Experiments have revealed just what occurs in the brain when one person shows empathy for another. In the lab, subjects typically are exposed to a painful stimulus while looking at photographs and taking either another person’s viewpoint or their own. These scans are compared to what happens in their brains when they look at the photos without pain exposure.

Notes Restak, author of 18 books about the brain: “By creating an atmosphere of trust, we enhance the oxytocin levels in the brains of those we come into contact with and vice versa…If I act in a trustworthy manner and thereby elevate that oxytocin level in the other person’s brain, he or she is more likely to trust me.”

Empathizing with clients is indeed essential to developing a solid rapport. “The key thing is that clients feel you understand how it feels to have their problems. When people are more trusting, they’re likely to give you more money to work with and are more forthcoming about the truths in their lives,” says Peterson, who wrote Inside the Investor’s Brain: The Power of Mind Over Money (Wiley- 2007). A former trader, he plans to launch a hedge fund in July based on the psychological factors that predict irrational decision-making.

Peterson continues: “Realize that the first time a client comes to you is because they have an emotional issue. It just happens to be around money: They’ve got money, and emotionally they don’t feel right about what it’s doing. The best communication has to be on an unconscious emotional level. First the client wants to know if they can trust you. The next level is: ‘Do you really understand what I’m saying?’”

Noted researcher Paul Ekman, professor emeritus of psychology at the University of California Medical School at San Francisco, says: “Like any salesman, an investment advisor needs to be able to understand the unspoken feelings of the client to develop a rapport and obtain their loyalty. Probably the most important thing is to be in tune with their emotions, their concerns, their embarrassments.”

Ekman is the pioneering expert on “face reading,” which can determine, among other things, if someone is concealing the truth. His famed technique, Facial Action Coding System (FACS), has been used by the FBI, CIA and the U.S. Department of Defense. Another of the psychologist’s clients is a large financial services company that recently hired him to determine, he says, if “people they’re considering investing in are telling the truth about their [firms'] prospects.

“There are three things you can get from the face,” according to Ekman. “They are: what the person feels and acknowledges, what feelings they’re fabricating and what emotions they’re trying to conceal.”

As for financial advisors’ clients, he notes, often they “don’t [want to] reveal their hesitations, worries or fears.”

Ekman’s company trains in the use of FACS, which focuses on the movement of a number of facial muscles. “You can miss the very fast movements if you blink — and most people miss them even when they’re not blinking,” says the psychologist, now offering an online interactive tool for self-training in his system (

Author of Emotions Revealed: Recognizing Faces and Feelings to Improve Communication and Emotional Life (Henry Holt-2003), Ekman expects “the next big thing” to be the ability to determine truthfulness from changes in voice quality. “The emotions of anger and fear look entirely different on the face, and I’m sure they have a different voice signature too.”

New research in social neuroscience is zeroing in on investor attitudes in relation to the tenor of the market. Professors have found that in periods of relative predictability, different parts of the brain are activated as opposed to times of unpredictability.

A predictable environment promotes longer-term rewards, the research suggests. Unpredictability — characterized by volatility, for example — makes investors focus on short-term rewards, says John P. Cacioppo, a social psychology professor at the University of Chicago and director of its Center for Cognitive and Social Neuroscience.

In predictable periods, he says, “investors can push their time perspectives out further and focus on longer-term rewards. But in unpredictable times, they’re more interested in short-term” returns.

FAs can also learn much from the way clients describe their financial goals, notes Cacioppo. “If they’re stated in a very concrete fashion, that suggests less flexibility in getting where they want to go than if they’re stated in a very abstract way.”

Brain research is uncovering, too, the neurophysiological character of key emotions and other feelings connected with risk. One of them is hope. It is associated with the part of the brain called the nucleus accumbens, which is the center for lust and desire. Fear — and loss aversion — is linked to the anterior insula (pain and disgust center), according to Hersh Shefrin, a professor of behavioral finance at Santa Clara University.

“If you stimulate the … nucleus accumbens before a financial decision is made,” he says, “you’ll find that people are prone to be more willing to take risks than otherwise.”

Shefrin cites a Washington University study — “Are People More Risk-Taking in the Presence of the Opposite Sex?” — in which subjects were presented with a mix of neutral and sensual photographs. Researchers, he says, found that “when you show guys sexy pictures and ask them to make a financial decision right away, they’ll make riskier decisions than if you showed them other kinds of pictures.”

A different part of the brain’s reward system is the medial prefrontal cortex (MPFC). It is activated, writes Peterson, “by the anticipation of earning money, and…drives pursuit of the…investments that one wants.”

How can social neuroscience help FAs resolve investing-strategy conflicts between, say, married clients? Brain imaging has shown that bringing the couple’s brains back into synchrony with each other can pave the way to a solution.

“Move away from discussing financial decisions, and put them on the same page by getting them to agree on something entirely different,” says Cacioppo. Once the two are in sync, neuro-imagery will show their brains to be in “complementary modes of activation. They’ll be empathic with one another — in physical resonance, like two clocks ticking at the same time.”

What does social neuroscience teach us about building client relationships?o People are more willing to work with strangers — i.e., give them money — when the strangers are similar to themselves.o Investors feel more positive and aroused by the potential of a reward than they are when a gain actually occurs.o Neurotic people are more reactive to signs of danger — but therefore are also more vigilant about potential risks.o People with high social intelligence decide if someone is trustworthy faster than people who aren’t as socially adept.o Gregarious, extraverted people jump at opportunities.o Depressed people are better at analyzing details.

What kinds of insight will social neuroscience provide in the decades ahead?As the century continues to unfold, social neuroscience is expected to exert a major impact on our lives — in many ways that we can’t even imagine. In fact, writes Richard Restak, professor of neurology at George Washington University Medical Center and author of The Naked Brain: How the Emerging Neurosociety Is Changing How We Live, Work and Love, “we will be encouraged to think of ourselves in terms and concepts drawn from neuroscience.”

Some brain doctors anticipate the introduction of drugs that can be directed at different portions of the brain to control, among others, risk-taking attitude.

“Using neuro-imaging,” writes neuroscientist Richard L. Peterson, partner in Los Angeles-based Market Psychology Consulting, “the potential for various bad financial decisions can [some day] be diagnosed and corrected.”

Professor of behavioral finance Hersh Shefrin, of Santa Clara University, even predicts a flight simulator-like contraption that will help advisory clients experience in advance events that would negatively impact their finances. This means, he says, that advisors, instead of “taking a wild guess with a risk-tolerance questionnaire, will be better able to put together financial plans based on how the investor is actually likely to react.”

In contrast to social neuroscience’s benefits, however, brain research will doubtlessly be used by some to try to manipulate our minds.

Citing that potential danger, neuropsychiatrist Restak writes that we’ll “achieve additional insights into the relationship of the brain to our most intimate and personal thoughts…We can employ this emerging new knowledge about social neuroscience to advance human freedom…or we can allow irresponsible people to use [it] in ways that are not always to our advantage.”

Freelance writer Jane Wollman Rusoff is a Los Angeles-based contributing editor of Research and is the founder of Family Star Productions.