Doctor of Philosophy in Economics
The graduate faculty in the School of Politics and Economics is proud to announce the dissertation defense for Steve Sapra to be held in the SPE Balitzer Board Room, CGU, Thursday, April 23, 2009 at 3:30 p.m.. The title of the dissertation is Neurofinancial Foundation of Investor Behavior. All are welcome to attend. A copy of the dissertation abstract is below.
Committee: Paul Zak, Chair
“Neurofinancial Foundations of Investor Behavior”
Steven G. Sapra
Claremont Graduate University, Department of Economics
Paul J. Zak, Ph.D. (Chair), Darren Filson, Ph.D., Arthur Denzau, Ph.D.
My Ph.D. thesis, titled “Neurofinancial Foundations of Investor Behavior”, links together findings from behavioral psychology, neurology, and financial economics. Comprised of three essays, my thesis begins with a survey paper of neuroeconomics, with a particular emphasis on financial markets, followed by a rigorous mathematical model, and finally an empirical genetics test of financial market traders. The thesis opens with the chapter “Neurofinance: Bridging Psychology, Neurology, and Investor Behavior”, which is a survey paper describing the evolution of thought from the rational expectations theorists of the 1970s, through the growth of behavioral economics in the 1980s and 1990s, up through the present-day field of neuroeconomics. The field of neurofinance - a sub-field of neuroeconomics - is truly in its infancy. This essay uses many of the findings from neuroeconomics to postulate a relationship between neural mechanisms in the human brain, and financial market anomalies such as over-reaction and herd behavior. The second chapter, “Stochastic Risk Aversion, Behavioral Over-Reaction, and the Role of Informed Investors’, describes a mathematical model of ‘behavioral investors’, who are characterized by random risk aversion shocks, and ‘rational arbitrageurs’, who attempt to exploit the over-reaction of the former cohort. I show that the presence of arbitrageurs results in a more stable market environment, less susceptible to market crashes. In the absence of ‘arbs’, markets are unnecessarily volatile and unpredictable. The final chapter, “Genes and Traders”, is a genetics paper, where we test to see if financial market traders have two particular gene mutations associated with clarity of thought and the ability to remain calm in the face of conflict. The gene we investigate, DRD4, is involved in the regulation of synaptic dopamine in the brain. We visited 5 broker/dealer firms in New York and took saliva samples from individuals employed as traders, as well as samples from 52 Claremont College students as controls (all research was approved by the Claremont Colleges IRB). We found that the traders were significantly more like to be homozygous for the “long” allele of DRD4 than the controls. Such a finding is consistent with our hypothesis that financial market traders need to be “cool under pressure”, and that this characteristic distinguishes them from the general population both behaviorally and genetically.