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Article: Thursday, 27 June 2024

The stock market might be one of the most difficult markets to forecast, but researchers at Rotterdam School of Management, Erasmus University (RSM) have found that brain activity of professional investors relates to future stock market performance. They used functional magnetic resonance imaging (fMRI) to collect brain data of 34 professional investors and found that brain activity increased when these investors analysed stocks that would perform well one year in the future. The researchers were PhD candidate Leo van Brussel; Associate Professor Maarten Boksem; and Prof. Ale Smidts all from RSM; and Dr Roeland Dietvorst from Goldman Sach’s AWM’s Sustainable Investing and Innovation Platform. Their research, Brain activity of professional investors signals future stock performance was published in the Proceedings of the National Academy of Sciences in April 2024, and was featured in The Wall Street Journal in May. 

 

The researchers found that activity in a part of the investors’ brains called the nucleus accumbens, involved in reward anticipation, could predict which stocks would perform well one year in the future and which would underperform. However, the investors’ consciously made predictions, using stock metrics, were not related to later market performance.  

According to the researchers, these results support the theory that neuroforecasting – using neuroscientific methods to predict population-wide behaviours – can be used to predict market behaviour based on the brain activity of a small sample, in this case, experienced investors. 

Usually, neuroforecasting studies collect brain activity from volunteer university students who represent a general sample of ordinary consumers, and the experiments involve the volunteers processing relatively simple information. However, in this study, the researchers presented experts – the professional investors – with complex information that would be unintelligible to untrained eyes.   

“We found that professional investors’ brain activity in response to complex, real-world investment cases relates to future stock market performance, whereas their own investment predictions do not,” said Leo van Brussel. 

We found that professional investors’ brain activity in response to complex, real-world investment cases relates to future stock market performance, whereas their own investment predictions do not

Collecting brain data 

The researchers invited professional investors with more than 10 years of experience to predict stock performance. Inside the MRI scanner, the investors were shown complex investment cases based on real-world data. After reviewing the information, investors were asked to predict if each case would overperform or underperform relative to its market segment over the following year. While performing the task, the investors’ brain activity was recorded. The researchers then analysed the brain data, the investors’ predictions, and the information that they were shown. The research took place at the Erasmus Centre for Neuroeconomics, a specialist research centre at RSM, and was a collaboration with NN Investment Partners (now Goldman Sachs). 

First reactions and gut feelings 

They found that only brain data from the nucleus accumbens region positively related to future stock market performance.  

Specifically, of the five information screens shown to investors, brain activity increased during the first two screens, which showed company profiles and price graphs. This connects to previous research findings that primacy of information can play an important role, and prompts new theories for behavioural finance about the importance of first reactions and gut feelings.  

“While we think it’s probably too soon for investment firms to buy MRI scanners and apply our methods, we do believe that our results show something about how experts make complex financial decisions and the importance of initial reactions and gut feelings. This is also echoed in other recent work,” said Leo van Brussel. “It also fosters a better understanding of human decision-making. This study focuses specifically on professional investors, but we think we also contribute to a broader understanding of how people make successful decisions, including investment decisions.” 

 

Practical insights into predicting investor's stock success 

Key neuroscientific insights into professional investor's decision-making and stock market success highlighted by this study are:

1. Predictive power of investors gut feeling

The activity in the nucleus accumbens, associated with reward anticipation, can predict which stocks will perform well in the future. This finding suggests that gut reactions and initial feelings of reward among investors are crucial indicators of stock investment success.

2. Brain signals outperform conscious predictions

Conscious predictions made by professional investors based on stock metrics did not correlate with future market performance, while their brain activity did. This suggests that the brain picks up important information, but that ultimately this information is not used when a deliberate, conscious prediction is made. 

3. Potential of neuroforecasting

The potential of neuroforecasting for stock investment predictions is supported by this study, suggesting that brain activity data from a small group of investment experts can predict broader market behaviors for financial forecasting.

L.D. (Leonard Diederik) van Brussel MSc
PhD Candidate
Rotterdam School of Management (RSM)
Erasmus University Rotterdam
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Leonard  Diederik van Brussel
prof.dr.ir. A. (Ale) Smidts
Professor of Marketing Research
Rotterdam School of Management (RSM)
Erasmus University Rotterdam
Photo
Ale Smidts
dr. M.A.S. (Maarten) Boksem
Associate Professor of Marketing Management
Rotterdam School of Management (RSM)
Erasmus University Rotterdam
Photo
Maarten Boksem
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