Influence of Basic Human Behaviors (Influenced by Brain Architecture and Function), and Past Traumatic Events on Investor Behavior and Financial Bias

Abstract

Human behaviors are influenced by past experiences. Stress and trauma are potent determinants of thought processes and decision-making. They also influence perceptions towards risks. Past studies have linked these behaviors to various financial biases. This article explores human behavior and impacts on investment decisions. Behavioral finance shows that investment decisions are affected by cognitive factors such as biases, mood, and emotions. They also influence the rationality and nonrationality of investment decisions. The paper demonstrates that human brain architecture is an element in decision-making due to its involvement in information processing and memorization. However, cognitive psychology does not fully address the underlying nervous system response to stress and perceived threats. Based on the findings, exposures to stress and trauma can increase the sensitivity to financial uncertainty. Individuals who experienced the devastating effects of trauma may be risk averse or excessive risk takers. This element of underlying Sympathetic Nervous System response explained by Polyvagal Theory as applied to behavioral finance and financial bias specifically, are not addressed in past or current literature.