the fear factor and centro

Running with the pack unwise on Wall St

Scientists say the brain's "fear centre" lights up in times of uncertainty. (AFP: Scott Olson/Getty Images, file photo)
Herd mentality rules during a financial crisis because people are wired to follow the crowd when times are uncertain, experts say.

Brain and behaviour studies clearly show that when information is scarce and threats seem imminent, people often stop listening to their own logic and look to see what others are doing.

Gregory Berns, a neuroeconomist at Emory University in Atlanta who studies the biology of economic behaviour, says right now fear factors are high.

"People are afraid, and the reason they are afraid is there tremendous uncertainty right now in the markets," he said.

Professor Berns puts people in magnetic resonance imaging or MRI scanners while he tests their responses to various scenarios and studies patterns of their brain activation.

One clear pattern is that the brain's "fear centre" lights up when people are uncertain.

"When people are presented with a situation where they don't have information or the information is ambiguous, we see activation of the amygdala and insula," Professor Berns said.

People begin to doubt their own judgment.

Professor Bern's team did an experiment in which they recruited actors and true volunteers.

"One real subject went into a [MRI] scanner," he said.

Professor Berns says they were asked to do a simple task, assessing shapes.

"We had the group [of actors] tell them the wrong answer sometimes," he said.

Professor Berns says the volunteers began to change their answers to match what the group said.

Perhaps they were merely overriding their own judgments for the sake of getting along, Professor Berns says.

But the scanner suggested another explanation.

"The group changes how you see the world in some way," he said.

"Our brains are really wired to accept the group opinion of the world."


Illogical reactions

In this case, running with the herd may not make good sense, Paul Zak of the Centre for Neuroeconomics Studies at Claremont Graduate University in California, says.

"There is this sort of herd mentality over-reaction," Professor Zak said.

"One of my colleagues actually pulled his money out of Washington Mutual a few weeks ago. He ought to know better."

The United States Government has taken over mortgage finance companies Fannie Mae and Freddie Mac, while Lehman Brothers Holdings has gone bankrupt, giant savings and loan Washington Mutual failed and Bank of America Corp bought Merrill Lynch & Co Inc.

The US House of Representatives rejected a $US700 billion bailout on Monday (local time), sending stock markets crashing globally.

Professor Zak says the reactions are illogical.

"I see no evidence that a depression is coming but it seems like people are behaving that way," he said.

The reason is evolution, Professor Zak said.

"We are really hyper-social apes. We learn almost exclusively from each other," he said.

"Gossip is really important because it is another way that we learn socially. Separating out rumour from fact is difficult, particularly in these complex markets."

Professor Berns, whose book Iconoclast comes out this week and aims to teach people how to avoid this herd behaviour, declined to dispense advice on weathering the current market.

"I am not a financial genius. I do know that when you see millions of people in the market essentially freaking out, that spills over into your brain and you get this impulse to do what everyone else is doing," he said.

Unlike the fear-filled masses on Wall St, Professor Zak says he knows what he is doing.

"I am buying stocks," he said.

- Reuters