Did you read the New Yorker piece last week on neuroeconomics i.e. the integration of neural-processes science into the study of economic decision making by individuals? I couldn’t help but think of the artworld when I read this section:
“When people make investments, they weigh the possible outcomes of their decisions and select a portfolio of stocks and bonds that offers the highest possible return at an acceptable level of risk. That is what mainstream economics says, anyway. In fact, people often have only a vague idea of the risks they face. … In one study, Camerer and several colleagues performed brain scans on a group of volunteers while they placed bets on whether the next card drawn from a deck would be red or black. In an initial set of trials, the players were told how many red cards and black cards were in the deck, so that they could calculate the probability of the next cards being a certain color. Then a second set of trials was held, in which the participants were told only the total number of cards in the deck.
The first scenario corresponds to the theoretical ideal: investors facing a set of known risks. The second setup was more like the real world: the players knew something about what might happen, but not very much. As the researchers expected, the players brains reacted to the two scenarios differently. With less information to go on, the players exhibited substantially more activity in the amygdala and in the orbitofrontal cortex, which is believed to modulate activity in the amygdala. The brain doesn’t like ambiguous situations, Camerer said to me. When it cant figure out what is happening, the amygdala transmits fear to the orbitofrontal cortex.
The results of the experiment suggested that when people are confronted with ambiguity their emotions More…can overpower their reasoning, leading them to reject risky propositions. This raises the intriguing possibility that people who are less fearful than others might make better investors, which is precisely what George Loewenstein and four other researchers found when they carried out a series of experiments with a group of patients who had suffered brain damage.”
Seeing as the artmarket is rife with such ambiguities, I see two ways to apply this finding. One is as an explanation of the herd mentality that drives so much collecting, i.e. that the people buying in the wake of Saatchi/Rubells/Horts/Ovitz are simply too scared by the ambiguities of the art market to buy anything riskier.
The more interesting implication involves the hypothesis that fear torpedoes people’s judgment, driving them to avoid risky but potentially rewarding strategies in favor of seemingly safer positions. Short term, this protects you, but if you are involved in a market long-term, the risk-takers win out. Which perhaps explains why so often the collectors that blazed their own aesthetic trail are so financially successful when/if they sell off their collections.
They bought based on their own judgment, not on fear. I’m only semi-certain that I’m even thinking about the findings correctly. What implications do you see in this?