For even the most level-headed among us, emotions can take over and lead us to questionable decisions when it comes to finances or investments. Figuring out why this happens, and how to prevent it, begins with understanding neurofinance – a relatively new discipline in the area of behavioural finance.
Vasileios Kallinterakis is an associate professor in finance at Durham University Business School and an expert in the field of neurofinance. In his view, businesses have much to gain from understanding the neural and emotional drivers behind financial behaviour. By recognising how subconscious processes shape decision-making, organisations can design environments, communication strategies and policies that encourage more rational, stable choices – both within their teams and among their clients.
How would you define neurofinance – and how does it differ from traditional behavioural finance?
Traditional behavioural finance seeks to understand how people think and act when making financial decisions. Neurofinance takes this analysis a step further by exploring what happens before those thoughts even form.
Through neuroimaging techniques, which provide detailed images of the brain, researchers can examine the neural activity underpinning financial decisions under certain conditions, including uncertainty, time pressure and potential gains or losses.
We are often not aware of how or why we make certain choices – our behaviour’s motives are largely unknown to us. This is because the brain reaches a decision within milliseconds, long before conscious awareness kicks in. What we commonly describe as a gut instinct is, in fact, the result of rapid, subconscious neural processes translating emotion into action. It’s both fascinating and scary: the idea that our behaviour is dictated by autonomic mechanisms taking place away from our consciousness, out of our control.
What insights has neurofinance revealed about how people make finance decisions under stress or uncertainty?
We know that financial decision-making is shaped far more by subconscious and emotional processes than by pure logic or mathematical reasoning, even when individuals believe they are acting rationally.
For instance, when financial choices are framed as potential gains or losses, activity increases in the amygdala, the brain’s centre for emotional processing. This helps explain common investor behaviours such as selling winning positions too soon while holding onto losing ones, actions rooted in emotional rather than analytical reasoning. Conversely, positive feelings can make it easier to access information in the brain, promote creativity, improve problem-solving, enhance negotiation and build efficient and thorough decision-making.
Recognising these neurological influences is essential for leaders, investors and policymakers aiming to foster more balanced, resilient decision-making under pressure.
Physiological factors also influence risk behaviour. Testosterone levels in male traders tend to rise after profitable trades and fall following losses, directly affecting their appetite for risk. Some studies even point to genetic links associated with risk-taking tendencies, suggesting that elements of financial behaviour may be biologically ingrained.
Importantly, neurofinance also challenges traditional gender stereotypes around risk. Contrary to popular belief, women are not inherently more risk-averse; rather, their willingness to take risks depends on context. Studies show women often display higher tolerance for social risks – in relationships or group settings – while in financial contexts, they may also engage in risk-taking but tend to do so more strategically and with greater contextual awareness.
How might business leaders apply neurofinance principles to improve decision-making within their own organisations?
Neurofinance offers critical insights into the underlying, often subconscious, drivers of human decision-making, performance and bias. It can explain why individuals don’t always act rationally with money, whether someone is naturally more risk-averse or how they might respond to certain financial incentives. These understandings can help organisations to optimise recruitment, training, product development, risk management and strategic thinking within a high-stakes financial environment.
Neurofinance insights could one day be used by employers to assess candidates’ innate risk profiles or cognitive tendencies. This would help identify individuals predisposed to thrive in high-stakes roles, such as fund management or trading – although such practices would raise serious moral and privacy concerns.
More practical and immediate applications of neurofinance lie in enhancing emotional regulation and mental resilience among employees. Since stress and anxiety often undermine rational decision-making, organisations should invest in training programs that teach mindfulness, encourage downtime and help employees achieve flow states that reduce cognitive bias and distraction.
What role could neurofinance play in investor relations and communication – particularly in building trust and influencing perception?
Understanding clients’ needs, risk profiles and investment attitudes can provide advisors with deeper insights into investor behaviour. These insights can also support strategic market timing by analysing crowd psychology and emotional market sentiment.
Research shows that individuals in a negative mood are generally less inclined to take risks, leading them to reduce investments in equities and similar assets. This opens the door to developing strategies that consider mood as a market factor.
However, applying such principles to intentionally influence or manipulate people’s perceptions – known as neuro-nudging – raises significant ethical concerns, as it involves deliberately shaping neural and emotional responses to drive specific financial behaviours and outcomes.
Given today’s volatile economic environment, what are you observing in investor behaviour from a neurofinance perspective?
Investor behaviour today is increasingly shaped by herding dynamics and social contagion, where decisions are guided more by trends and image than by fundamentals. Investors swiftly pivot between the latest market narratives – be it geopolitical risk, artificial intelligence or climate finance – chasing momentum to avoid being left behind.
This dopamine-driven decision-making activates the brain’s reward centres, fuelling a stronger fear of missing out than of financial loss. This biochemical reinforcement creates pleasurable sensations associated with gains, encouraging repetition of risky behaviour.
Today’s investment decisions are often influenced more by image, identity and social validation than by analysis. Many investors follow brands and fads, investing for entertainment or social status. The digital environment amplifies this by blurring reality with fantasy, which can fuel the spread of misinformation.
Soaring interest in AI-related assets has sparked debate over whether their inflated prices are detached from actual value. Can neurofinance shed any light on the psychology behind market bubbles?
The core reasons behind market bubbles haven’t changed for centuries. People want to get rich and the brain is wired to seek novelty or rewards – and few things are as thrilling right now as AI. The allure of the unknown, combined with a tendency toward risk-taking and even boredom, plays a significant role in driving this behaviour.
In my book, Dawn of Behavioural Finance, 1688, the roots of behavioural finance can be traced back to the 17th century, showing that financial decision-making has long been shaped by the same psychological biases that still influence us today, some 400 years later. It offers a sobering perspective on current concerns about a potential AI bubble: although humans have the capacity to learn from their mistakes, the fact that the same biased behaviours persist over centuries suggests that we either fail to learn – or simply don’t care to.
Where do you see neurofinance heading in the next five to ten years? Do you think it will become a mainstream part of corporate strategy or remain a niche discipline?
The capacity to analyse and enhance human cognitive performance under stress promises significant growth in specialised areas such as corporate finance, HR and executive training. That said, neurofinance remains highly dependent on costly technologies, such as MRI scanners, and requires specialised laboratories and expertise – factors that make widespread adoption across firms more difficult.
The future of neurofinance is also closely tied to pressing ethical concerns, particularly if its insights are used to manipulate decision-making or influence recruitment practices. But as people grow increasingly comfortable sharing personal data with advanced technologies such as AI, I think they may also become more accepting of the idea of brain scans as part of employment screening.
For businesses, neurofinance offers both potential and peril: it gives leaders the means to make corporate decision-making more adaptive and precise, but only if its methods are applied ethically and with full respect for human complexity and cognitive diversity.
For even the most level-headed among us, emotions can take over and lead us to questionable decisions when it comes to finances or investments. Figuring out why this happens, and how to prevent it, begins with understanding neurofinance – a relatively new discipline in the area of behavioural finance.
Vasileios Kallinterakis is an associate professor in finance at Durham University Business School and an expert in the field of neurofinance. In his view, businesses have much to gain from understanding the neural and emotional drivers behind financial behaviour. By recognising how subconscious processes shape decision-making, organisations can design environments, communication strategies and policies that encourage more rational, stable choices – both within their teams and among their clients.
