Wednesday, November 03, 2010

Bubble Magic & Then Some

The Nytimes posted a really interesting article about biology and economic bubbles titled Microscopic Microeconomics whereby researchers conducted a sophisticated experiment using real data to see how the brain reacts to economic bubbles.

Montague’s experiments go like this: A subject is given $100 and some basic information about the stock market. After choosing how much money to invest, the player watches as his investments either rise or fall in value. The game continues for 20 rounds, and the subject gets to keep the money. One interesting twist is that instead of using random simulations of the market, Montague relies on real data from past markets, so people unwittingly “play” the Dow of 1929, the S&P 500 of 1987 and the Nasdaq of 1999. While the subjects are making their investment decisions, Montague measures the activity of neurons in the brain.

At first, Montague’s data confirmed the obvious: our brains crave reward. He watched as a cluster of dopamine neurons acted like greedy information processors, firing rapidly as the subjects tried to maximize their profits during the early phases of the bubble. When share prices kept going up, these brain cells poured dopamine into the caudate nucleus, which increased the subjects’ excitement and led them to pour more money into the market. The bubble was building.

But then Montague discovered something strange. As the market continued to rise, these same neurons significantly reduced their rate of firing. “It’s as if the cells were getting anxious,” Montague says. “They knew something wasn’t right.” And then, just before the bubble burst, these neurons typically stopped firing altogether. In many respects, these dopamine neurons seem to be acting like an internal thermostat, shutting off when the market starts to overheat. Unfortunately, the rest of the brain is too captivated by the profits to care: instead of heeding the warning, the brain obeys the urges of so-called higher regions, like the prefrontal cortex, which are busy coming up with all sorts of reasons that the market will never decline. In other words, our primal emotions are acting rationally, while those rational circuits are contributing to the mass irrationality.

In reading this, one sees something profound about fleeting instances of intuition and how we often ignore it at our peril. For instance, when driving on country roads, I sense when cars are coming around a blind corner without fail. The subtle, quick moment of fear or certitude regarding this feeling I never ignore as it's too important, thus preventing yours truly from crashing into somebody on a regular basis. No doubt most people in my town, at least, experience this same flash of intuition because they didn't, the level of accidents in said environs would soar to unheard heights but adherence to heeding these fleeting flashes of intuition on other matters seem not to apply, much to my detriment, due to distractions generated by my mind in the same way to those experienced by Montague's subjects.

 With this in mind, pardon the pun, it seems synchronicity may play an imporatnt role in how the brain interprets intuition due to the fact synchronicity appears to relate to quantum mechanics in deep fashion  as both synchronicity and quantum mechanics question the notion of cause and effect in ways that cannot be ignored.

In his book Synchronicity (1952), Jung tells the following story as an example of a synchronistic event: "A young woman I was treating had, at a critical moment, a dream in which she was given a golden scarab. While she was telling me this dream, I sat with my back to the closed window. Suddenly I heard a noise behind me, like a gentle tapping. I turned round and saw a flying insect knocking against the window-pane from the outside. I opened the window and caught the creature in the air as it flew in. It was the nearest analogy to a golden scarab one finds in our latitudes, a scarabaeid beetle, the common rose-chafer (Cetonia aurata), which, contrary to its usual habits had evidently felt the urge to get into a dark room at this particular moment. I must admit that nothing like it ever happened to me before or since." [12]

As a thought experiment, look at this example of Thomas Young's elegant experiment regarding light to see why reality is stranger then one can imagine. Enjoy.

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