NEURO FINANCE – FUTURE OF ECONOMICS?

Rationality. A word that has been the safe haven for many students during the economics exams. A word, which we feel content using, but dissatisfied in the definition. Neuro-Finance is a field that brings the possibility of analyzing, observing, and diverging a human’s cognitive process towards all functions related to finance, basically removing the rational assumption, and defining every concept with near accuracy. This article aims to introduce you to the new age concept of Neuro-finance and how it will change the world (including, sadly, your economics textbooks)

Note: Kerstin Preuschoff and Elise Payzan have researched the most about this topic, but we shall be concentrating more on Payzan’s work as it's more definitive and realistic.

What is it?

Neuro-Finance is the branch of finance related to the nature of the cognitive process of a human mind and how it goes about making the decisions related to one’s finances, Hence quite simple, to narrow down why, how, and what of every financial decision taken by an individual. The term as simply laid out, is a mix of neuroscience and finance, hence using the technical expertise of neuroscience in ascertaining the behavioral economics of humans. Neuro-Finance attempts to explain finance and economics, not from a rational perspective, but rather a bounded rational one, meaning rational, but only till a specific limit.

How is it done?

As quoted above the field is in a research phase hence the experimental nature of work takes on the face of the field. Hence the lab work is taken for the same and on the following terms.

Two extremes are put in place, for example one would be an excessively rational human (Vision) and the other, quite irrational (Iron Man) and yes we will be carrying forward with these marvel references ( Sorry DC Geeks :p). Giving both similar cases to make decisions on, the observation is made regarding two factors, being:-

• Behavior

• Scanned image of Subject’s brain

Both points being self-explanatory as regarding the workings of the experiment and derived result technique, I will not go into the Biological aspects for the experiments as it remains outside of finance and we shall focus on the same right now.

Why do we need it?

Having reached till here, you must be wondering, “if it’s so damn new, and if it is so brain type thingy like, Why the hell do we need it? Like we aren’t professor X” (Even if you didn’t think this, sorry but I’ll be answering it anyway.)

Neuro-Finance attempts to shift the economic landscape from the classical or Keynesian theory to the modern contemporary economics, one which will become synonymous with this term. Adam Smith once defined economics as the science of wealth, well Neuro-Finance aims at analyzing, observing, and breaking down every aspect and decision which a human partakes in when he dwells in that science. The mathematical field of economics and finance, which stopped at simple rationality, now brings around a whole new set of equations, which means more answers, more ways, and more ideas regarding the accumulation of wealth and economics.

These set equations will bring around the most efficient decisions. This science will further our understanding of the environmental surroundings which facilitates the most efficient investments and trading in the present and in the future. Deciding how one individual’s requirement is successfully satisfied not only amplifies the time value of money but especially the psychological value of money

As one unit of money is not the same for all. All of us are different. Hence unique minds calls for a new economic structure – Neuro-Finance