The Risks of Greed and Fear in Financial Decision Making

How do financial crises occur? It all starts with greed driving bonus-crazed traders to unreasonably risky choices. It gets worse through irrational snap decisions made by investors driven by fear. It ends up with a market collapse leading the whole world to economic crisis. But what if this chain of events were more than a social construction? What happens in the human brain when facing financial choices?
To understand how greed and fear trigger our decisions, Helena Pikulina suggests a new approach using neuroscience to identify cognitive biases that interfere with financial decision making. Her results could allow investment firms to design better incentive schemes for their traders and introduce breakers to trades. Hopefully, it could also be used by policy makers in drafting effective regulation to prevent fraud. And more generally, the key players influencing financial decisions could rationally choose not to pull the trigger to financial doomsday.
My research aims at uncovering the differences in traders’ strategies, performance, and behavioral biases under different compensation schemes and in different economic environments. Reward schemes of traders finally define trading strategies of large corporations and funds, which are becoming more and more powerful players in the stock market. Understanding behavior under different reward schemes will help investment firms be able to design better incentive schemes for their traders and introduce circuit breakers to trades to prevent collapses. In my current work I focus on two different reward schemes, linear and convex ones.