Investors with certain kinds of brain damage can often make better financial decisions than normal people, suggests a study by researchers from Carnegie Mellon University, the Stanford Graduate School of Business and the University of Iowa.

The damage that guided investors in this study stems from a specific lesion in the region of the brain that is in charge of controlling emotions. The lesions were the result of various causes, including stroke and disease, which somehow impaired participants’ emotional functioning and perception of risk. Essentially, the participants in the study with this type of lesion seemed to lack the fear that plagued other investors, researchers report.

This research is part of the emerging field of neuroeconomics, which explores the role biology plays in practical decision-making. Using MRIs, psychological tests and other tools, neuroeconomists peer into brains to see which regions are activated when people are evaluating risks and rewards.

For this study, which was published in the June issue of Psychological Science, the researchers compared three groups of people: those with lesions in the brain regions dealing with emotion; a control group whose lesions were unrelated to emotion; and normal subjects with no brain damage. Despite their disabilities, the brain-damaged participants had normal IQs; the areas of their brains responsible for logic and cognitive reasoning were also intact.

All participants were given $20 in play money, which they were encouraged to consider as real because they would receive a gift certificate for any amount remaining following the experiment. They were then asked to make several rounds of investment decisions, each of which revolved around whether or not to invest US$1.

If participants chose not to invest during a round, they got to keep their dollar. But if they chose to invest it, the success of the investment was based on the flip of a coin. If the coin came up heads, participants would lose the US$1 they had invested. If it came up tails, US$2.50 would be added to the participants’ accounts. Because the odds of either possibility were 50/50, the optimal choice was to invest in each round. But that was not what happened.

The experiment lasted 20 rounds, and the emotionally impaired participants outperformed the two other groups, earning US$25.70 on average. The normal participants earned an average of US$22.80 and the lesion control group earned US$20.07.

Interestingly, the normal participants invested in about 58% of the rounds, whereas their emotionally impaired counterparts participated in about 84% of the rounds.

These latter players were also more willing to take higher payoff chances because they weren’t able to be afraid of the consequences. Players with no neurological damage were more cautious, winding up with less money as a result.

No one is suggesting it is a good thing for an investor to have such life-changing brain lesions. Nor is a healthy dose of apprehension necessarily a bad thing when it comes to investing. But for this particular experiment, risk-taking was the most advantageous behaviour, so the participants who were less fearful made the more profitable choices.

However, in other studies, the experiments were set up so that risky choices had lower expected values. In these instances, normal subjects tended to perform much better — reinforcing the notion that investors generally have a tendency toward being risk-averse.

It is also worth noting that the brain-damaged players did not perform as well in the real world. Several of the brain-damaged players had experienced personal bankruptcy, for instance.

Most theoretical models of risk-taking assume that decision-making is largely a cognitive process, balancing different possible outcomes with their probabilities. Nevertheless, intense emotions can undermine investors’ capacity for rational decision-making, even when individuals are aware of the need to make careful decisions, the researchers concluded. IE