Abstract
A widely observed phenomenon in the financial market is the irrational herd behavior of investors who tend to move together in stock trading under certain market conditions. While behavioral finance literature tries to explain investors’ sentiments and behaviors through psychological factors, neural finance studies explore the brain activity during their financial decision making. This preliminary study depicts an experimental design for investigating the neural basis of herd behavior in stock trading under both the normal market condition when investors trade strategically, and the extreme market condition when herd behavior exhibits. In particular, I predict that two brain regions, namely the anterior insula and the medial prefrontal cortex, would be significantly activated when the investor faces dramatic price fluctuation and smooth price change respectively. Several conditions are contrasted to make more detailed predictions about how these regions are correlated with certain trading behaviors. More inferences are subject to further experiment results and comparisons with other social behavioral studies.
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