Marketplace Scratch Pad

Happy faces and porn

Scott Jagow Apr 8, 2009

I’ve got it! I’ve finally figured out why Wall Street took so many risks and brought down the financial system. The answer lies in a University of Michigan experiment.

Michigan grad student Julie Hall conducted the experiment and found that showing people a smiling face, even for an instant, encourages them to make risky investment decisions.

She had 12 male and 12 female volunteers play a stocks and bonds game. They had to repeatedly choose between investing in a “safe” bond that paid $3 consistently or two riskier stocks. At the beginning, they didn’t know which stock was good and which was bad. As the experiment unfolded, the good stock became bad and vice-versa:

Under these circumstances, the rational strategy is to keep investing in the safe bond. This is mostly what participants did – but only when they were shown an image of a face that showed no emotion before each round. Volunteers who were shown a happy face were much more likely to choose the risky stocks. It made no difference whether the face was displayed long enough for the volunteers to register it consciously, or flashed up fleetingly so it was only perceived subliminally.

Another researcher, Brian Knutson, a psychologist at Stanford University in California, says it’s hard to tell how much being in a good mood influences the real financial market.
But his own “investment game” research found that risky decisions are preceded by activity in one part of the brain, while a different part of the brain was stimulated before making safe bets.

He also found that showing men erotic pictures leads to risky investment decisions.

So, now, we finally have the formula — happy traders looking at nudy photos = economic destruction.

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