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How Does Neuroscience Affect Our Understanding of Risk?

How Does Neuroscience Affect Our Understanding of Risk?
"""How does the average person react to risk, and why? Why are some persons absolutely risk-averse while others are more willing to take on danger than others?

These are issues that many business leaders are asking as neuroscience teaches us more about the brain's functions and how we make decisions, particularly (but not exclusively) those in the finance and insurance industries.

The world would be a lot more stable if everyone managed risk properly, but we all know that's not the case. If we could all respond to risk successfully, everyone would retire with enough money, and we would have fewer accidents, for starters.

initial risk models

Seventy years ago, the earliest models to examine risk behavior were based on the very constrained notion of ""anticipated utility,"" which states that people evaluate potential outcomes by dividing the likelihood of something occurring by how much they would like it to.

The prospect theory, which helped Daniel Kahneman earn the Nobel Prize, proposed that humans estimate outcomes relative to a reference point, but that this reference point is difficult to define and might change unexpectedly. However, in the real world, this theory was found to be lacking.

Many times the rational, predictable, logical processes that economists expected were found NOT to be driving decision-making; cognitive biases and emotion play a much more important role than previously suspected. While other models have tried to advance the ""science of risk,"" most fail to address the question of how people really make choices and how they form their vision of the future.

Although it is challenging to forecast these cognitive biases and the variety of emotional triggers, neuroscience has the potential to deepen our understanding of risk and decision-making.

Cognitive neuroscience's potential

There are no set ""laws"" that can be applied categorically to how people react to risk because the world is unexpected and uncertain.

However, since the use of functional magnetic resonance imaging became more prevalent, there has been a sharp increase in the number of studies on how the brain functions.

For instance, in a study at Stanford University on rats, researchers found that a group of neurons light up when a safe alternative is picked over a risky one; it's possible that same neurons are also present in the human brain, which could reveal crucial information regarding risk avoidance.

A better understanding of risk behavior could potentially help us prevent future stock market ""bubbles"" and ""bursts."" Imagine studying the brains of traders on the stock market as they make decisions based on their daily returns. What happens when they experience significant losses or gains? How does this affect their decision-making? How does risky behavior spread through the market? What are the social cues and biases at work?

These studies are now well under way in neuroscience labs, and as major corporations and government authorities show an increased interest, we may anticipate seeing additional research in the near future."""
 

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"How Does Neuroscience Affect Our Understanding of Risk?" was written by Mary under the Business category. It has been read 47 times and generated 0 comments. The article was created on and updated on 17 November 2022.
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