CRF Blog

When brain says buy, you may not know why

by Bill Hayes

In When brain says buy, you may not know why, the Los Angeles Times reports on a new neurological study on why humans create economic bubbles.

“For whatever reason, if you put a bunch of people together and they start trading, these markets generate bubbles,” said Alec Smith, a neuroeconomist at Caltech in Pasadena and lead author of the new study published Monday in the Proceedings of the National Academy of Sciences.

That’s exactly what Smith, who spent seven years working as a professional stock trader, found in his latest experiment. He and his colleagues set up more than a dozen experimental markets that included about 20 college-age participants who traded for 50 rounds. (While college students are not professional traders, previous studies have found no difference in their behavior, Smith said.) [more]

For a free classroom lesson on bubbles, see “Tulipmania and Economic Bubbles.” It is available from our Bill of Rights in Action Archive. It is currently only in PDF and you will have to register (if you haven’t already), which is free.