This Is Your Brain on Price Bubbles

Colin Camerer is heralded as a pioneer of neuroeconomics: the scientific study of how brain activity drives economic decisions.

Source Photo by Sean Culligan, Composite by Alex Furuya

Why you should care

Because neuroeconomics can predict market crashes and even treat mental illness.

This OZY series reveals what some of academia’s biggest brains are up to. This original OZY series reveals what some of academia’s biggest brains are up to.

Deep in a lab at Virginia Tech University, a study participant is enclosed in a cylindrical fMRI brain scanner. He chose to sell an artificial asset, while a participant in another fMRI machine — similar to an MRI but designed specifically to measure changes in blood flow to the brain — kept hers. And as they evaluated potential trading options, the fMRI technology recorded their brain activity.

Just as football coaches pore over video of athletes, Colin Camerer would later scrutinize the brain signals of these participants from the other side of the country at Caltech. The year was 2011, and Camerer was eyeing the brain regions that show activity when people trade in order to gauge the implications for price bubbles — which is when a good is overvalued, and a sharp contraction follows. Camerer was singing this tune before the infamous burst of the housing bubble in 2008. The last 20 years have been great for rebutting the skeptics of neuroeconomics, the behavioral economics professor says with a chuckle. “Markets melting down,” he jokes, flapping his hands wildly. “It’s almost like if you study crime and have arsons and serial killers.”

Camerer, 59, is heralded as a pioneer of neuroeconomics: the scientific study of how brain activity drives economic decisions. His work linking neuroimaging with empirical behavior in topics like habit, game theory, self-control and risk has helped the field gain steam. He’s fascinated by flaws in human judgment — why people’s actions diverge from perfectly rational predictions (every economist he knows pays off their credit card bills each month and is “flabbergasted by any foible of human behavior”). Camerer authored Behavioral Game Theory in 2003, has been chair of the Russell Sage Foundation Behavioral Economics Roundtable since 2007 and was named a MacArthur Fellow in 2013. He says he’s inspired by Richard Thaler, who won the 2017 Nobel Prize in Economics, and Camerer himself has been included on lists of prospective Nobel contenders. 

His research enables scientists to surf through brain imaging to identify when people are participating in a market that’s about to crash. 

“In academia, the word ‘brilliant’ is thrown around often, but Colin was obviously a standout,” Thaler says, recalling his early impressions of Camerer as a Ph.D. student. “As far as I could tell, he could learn (and master) anything.” Camerer’s work has stretched science and pushed boundaries in ways that haven’t been done before, adds Read Montague, a neuroscientist and physics professor at Virginia Tech who has collaborated with Camerer for 15 years, including on the experiment with price bubbles.

The son of a salesman, Camerer hopped between Philadelphia, Cleveland and Baltimore as a kid, skipping several grades in the process. His parents, immigrants from Ireland and Germany, stressed how education could provide more opportunities. Young Colin spent weekends at museums, parks and libraries, sneaking in precious TV minutes when his mom was napping. The prodigy graduated from Johns Hopkins University at 17, earning an M.B.A. and a Ph.D. from the University of Chicago by age 21. 

 

More than anything, Camerer is energized by novelty. “I’m trying to do something new that’s hard,” he says, wearing a Steve Jobs–esque black turtleneck in his office on Caltech’s quiet campus in Pasadena, California. Economists are reluctant to believe empirical results without seeing a mathematical or economic mechanism first, says Montague. But it’s hard to argue with brain scans — and Camerer’s fMRI experiments soon gave merit to the association between brain activity and irrationalities. 

“I had a fanaticism that we were on the right track,” Camerer says. “Skepticism is like fuel. It means you’re on to something interesting.” Science progresses, as Camerer puts it, “funeral by funeral.” Skeptics grow old and die, while younger students bring fresh energy.

But academic pushback has faded into his rearview as Camerer’s field proves relevant to everything from exercise habits to handling money. Montague believes neuroeconomics will influence how mental illness is treated and market instability is predicted. The multi-round trading experiment, for example, revealed patterns in the brain chemicals dopamine and serotonin of participants with “traditionally defined mental disorders” like ADHD, multiple personality disorder or depression. Montague expects clinical psychologists and pharmaceutical companies to begin applying neuroimaging insights to treatment design. Meanwhile, the price bubble research enables scientists to surf through brain imaging to identify when people are participating in a market that’s about to crash. These implications come with some urgency: Who wouldn’t want to predict the next Lehman Brothers collapse before it happens?

Colin 4

The brain is his domain.

Source Sean Culligan/OZY

In spite of its tall upside, there are still structural challenges to the bridge Camerer is building between disciplines. Economists want to see a clear puzzle solved, while scientists measure success by accumulating a growing body of evidence. Then there’s the different pace: People are often too quick to translate incremental scientific progress to public policy, Montague says. In economics, on the other hand, a two-year lag time is typical before submitted research gets published, with another 10 years before it’s applied in the real world, Montague says. But private industry could latch onto these findings sooner. Camerer points out that marketers could eventually use neuroscientific data to sell products more effectively — and those things could be good or bad for you. Whether regulators could or should step in is another matter. 

Away from the brain scans, Camerer is dynamic and approachable. “He was not [merely] some brainy geek,” Thaler says. Camerer started a “post-punk” record label called Fever Records around 1980, and he is an excellent mimic, according to Thaler (though Camerer’s imitation of him, Thaler insists, is only “so-so”). And throughout his rise, he’s stayed humble in a manner unusual for famous academics, says Teck-Hua Ho, a professor at the National University of Singapore who studied under Camerer. 

Colin at cassims around 1980

A younger Camerer, circa 1980.

Ho pegs Camerer as a true scholar at heart: He was never tempted by money or consulting, regularly comments on students’ papers and insists on citing even unpublished research. It’s evident in a lunch with students, as he hums with intellectual energy, scratching his head, smiling widely and cracking jokes even as the conversation drifts into topics like autism and sociopathy.

Camerer, for one, thinks he was born half a generation too late to win the Nobel. He seems more interested in propelling his field forward. An Olympic athlete should be thrilled if their record is broken, he says. This academic is eager to cultivate the next generation of mind-readers and push the bounds of what they can do — even if he’s not ready to hand off the fMRI machine just yet.

OZY’s 5 Questions With Colin Camerer 

  • What’s the last book you read? Bloodlines: The True Story of a Drug Cartel, the FBI, and the Battle for a Horse-Racing Dynasty, by Melissa del Bosque.
  • What do you worry about? Not living long enough to see my son grow up. But I try to bottle that. The thing to do is to go home and hug him enough.
  • What’s the one thing you can’t live without? Probably books.
  • Who’s your hero? Maybe Thaler. He’s a good hero. 
  • What’s one item on your bucket list? Taking a road trip to the Grand Canyon. 

Read more: The whiz kid building a better cyborg. 

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