The study by scientists at the University of Pennsylvania, published today in the journal Neuron, found that variation in connections between two parts of the brain — the amgydala and the medial prefrontal cortex (mPFC) — were associated with how much risk an individual will tolerate to achieve a greater financial return.
The researchers studied 108 healthy young adults, first giving them detailed questionnaires featuring 120 different scenarios involving the risk of making more or less money to assess their comfort with financial choices. These scenarios gave participants four seconds to make a choice between a 100% certain smaller financial reward (e.g., $20) or a probability of receiving a larger reward, the amount and chance of which varied in each of the 120 trials (e.g., 48% chance of receiving $80). The scientists then used this data to place individuals on a wide spectrum of risk tolerance, ranging from extremely risk-averse to extremely risk-seeking.
Joseph W. Kable, lead author of the study, summarized the study by saying: "We assessed risk tolerance by giving people an opportunity to gamble. We assessed how willing individuals were of accepting the risk of getting nothing for the chance of getting a higher amount of money."
Separately, using three different types of MRI brain imaging, each able to pick up different aspects of brain structure and function, the researchers mapped the connections between different parts of the participants' brains. They then combined this data with the risk information gained by the questionnaires and scenario responses, finding that individuals with a higher tolerance for risk had a larger amygdala with different connections to the mPFC region of the brain than those with a lower tolerance for risk
"The three measurements — structural and functional connections and the volume of amygdala gray matter — reinforce each other to suggest that there is something important about the function of this system related to differences in how tolerant people are to taking risk. Just by looking at these features of your brain, we could have a reasonable idea if you are someone who will take lots of risks or not,” said Kable.
The researchers plan to work with financial planning organizations to see how these findings can be used to analyze risk tolerance when larger, real-world economic decisions are at stake.
"Financial planners aren’t happy currently with the instruments they have to analyze risk tolerance. Perhaps we can use these methods to get a better assessment for someone's economic risk tolerance to provide the best advice possible for that particular individual," said Kable.
However, the study assessed people's tolerance for risk taking only when the probability of each possible outcome was known; for example, a coin toss has a 50% likelihood of heads and a 50% probability of tails. In addition, there were no negative consequences for participants other than not winning the money offered within the study, which of course sadly does not reflect the real-world scenario with investing.
“Clearly this isn’t ready to implement tomorrow, and we need to do more validation of these connections in the brain and relationship with risk tolerance. We need to test these findings on real-world applications such as in cases where people can win or lose money and the probabilities of this occurring are unknown,” said Kable.
Professor Timothy Caulfield, Canada Research Chair in Health Law and Policy, University of Alberta, urges caution: "We need to take care to not overinterpret fMRI data. While this kind of work is interesting, it is measuring blood flow and tissue connections in the brain in a highly controlled environment. We don't know what it will say about real-world behavior. Risk taking is a complex phenomenon that is likely influenced by many factors. It seems like a big leap to go from a lab study to using this technology to inform financial decisions."
Although MRI imaging has been widely proven to be safe, companies wanting to assess the financial risk tolerance of potential employees or clients could face some difficult ethical hurdles by using a scan that may unwittingly pick up medical issues.
"Imagine getting an MRI for financial planning purposes, and they find something that may or may not have relevance to your health. Also, if, in fact, this is highly predictive, how will the information be handled and used?” said Caulfield.
Kable stresses that more work needs to be done to evaluate the ethical issues raised by his work: “It’s important for people to realize what kind of information is gleaned from these kind of brain scans. What are we revealing about them? What happens if we do incidentally find something that relates to their health?”
Clearly, analyzing brain scans is not currently within the ability of most financial planning organizations, but Kable foresees that changing.
“If you had said to me 15 years ago that companies like Nielsen would be employing a team of neuroscientists, I perhaps wouldn’t have believed you, but now they do. The idea of using these brain markers and pairing them with some questionnaire or other assessments may help determine a better, more well-rounded sense of your tolerance for risk," said Kable.
Victoria Forster, Contributor