You have a Ph.D. in neuroscience and teach courses on neuroscience in financial decision-making. Where does your interest in this topic come from?

Before studying neuroscience, I got a double Master’s in management and worked for two years in the corporate world so I’m not exactly a fish out of water in finance. However, I found a way to combine the two fields when an opportunity presented itself. When I was close to finishing my doctorate in neurosciences at the University of Geneva, a new lab of Neurofinance was about to open at the Geneva Finance Research Institute. I thought it would be a good way to build on my previous education and work experience and be a part of something new. Indeed, even today, there are only a handful of research labs specializing in neurofinance in the world.

Investing seems to be a rational undertaking. Why bother with a psychological approach to it?

Good question! Despite the rise of machines, investing is still mostly done by humans and we are, well, biologically rational but irrational from the point of view of normative economic theory. And despite Fama’s efficient market hypothesis which states that asset prices reflect all available information, making it difficult or impossible for an investor to consistently outperform the market and the Nobel prize he received for it in 2013, stock markets are, in reality, often not efficient, at times due to factors such as collective emotions, beliefs and our dislike for uncertainty. From my perspective, it is interesting to study where biology and classical economics clash not to try to make humans decide more like homo economicus but rather to make finance more humane and adapted to homo sapiens.

How do traumatic family events, such as the loss of the family fortune during WWII, affect the investment decisions of the next generations?

According to several influential studies, an individual’s risk preferences are affected by traumatic life experiences, such as being in combat or otherwise experiencing war itself. Even decades later, such individuals take less financial risks than those who haven’t experienced trauma.

Investing means buying assets with a reasonable expectation of return over time. Speculating and gambling means just wanting to get rich quickly, more often than not with the result of losing. How does science explain this tendency?

There can be several motivations behind choosing a high-risk short-term gains approach to investing. First, it can be a completely economically rational choice given an opportunity in a highly volatile environment, an opportunity that we know won’t last long. Think about the Bitcoin rush. Unfortunately, such speculative actions can lead not only to high losses for the individual investor but also to broader market destabilization and long-term loss of trust in the stock or class of stocks.

Some investors choose opportunistic gains because they were taught, most likely by classical economists, that profit is king and “greed is good”. They may even engage in such an investing behavior repeatedly because high-risk, high-stakes situations generate a lot of adrenaline during the uncertainty stage and a significant release of dopamine when this high-risk gamble turns out to be a winner. You may recognize that this is the same mechanism that makes many games of chance attractive and addictive and it has to do with the very basic reward learning mechanism of dopaminergic neurons. If you like risk or are at least risk-neutral, to begin with, you will experience that winning an uncertain gamble feels much more rewarding than winning a sure or close-to-sure one. That is because the dopaminergic neurons fire longer when the reward follows the resolution of a highly uncertain gamble. However, some people prefer certainty and for them this type of game would feel overwhelmingly stressful. Naturally, such people are unlikely to become compulsive gamblers. In addition, there are genetic predispositions related to the reactivity and amount of certain types of dopamine receptors in the ventral striatum – the area in the brain that represents subjective value.

Finally, the last risk factor for becoming dependent on games of chance is the ease of giving in to temptation which is called trait impulsivity. In the brain, this trait is correlated with the strength of functional coordination between your subcortical reward center, the ventral striatum and the prefrontal executive control regions. People with poor self-control and high sensitivity to reward will enjoy gambling and give in to it more because it is like getting high on your brain’s endogenously released drug, dopamine.

Some people value safety very highly while others seek the thrill of risky activities. What goes on in our brains when we need to decide if a risk is worth taking or not?

Many things. Such a decision is complex and can be taken deliberately, weighing pros and cons or impulsively, without reflection but following one’s subjective value response. People tend to make more risky decisions when under time pressure. How risk-averse a person is may also differ from one domain to another. For instance, you may be okay investing in stocks but don’t enjoy fast rides on a motorcycle. From multiple fMRI studies in neuroscience of decision-making under uncertainty we know that for both of these decisions, there is a network of brain areas that represents the subjective value of risk. This network comprises the insular cortex – an area that also responds to pain and disgust and overall interoception, which means the feeling of what’s going on in your body, and the anterior cingulate cortex, which is an area for response switching and is long identified as the “error recognition” spot. A dialogue ensues between the risk network and the subjective value network, ventral striatum and ventromedial prefrontal cortex and the final decision whether to approach or flee the risky option is determined by the relative signal strength in the value network compared to the risk network.

What is your personal stance on financial risk?

Being financially literate is a must nowadays as everything revolves around money and surveys show over and over again that financial illiteracy is correlated with poorer personal financial health or a higher debt-to-assets ratio. But I can also clearly see that people with deeper pockets can handle more potential loss and therefore afford more risky financial decision-making. I think it is rational to be cautious and not to gamble with your livelihood beyond a certain minimum cash buffer that one needs to feel secure. For a single person without children, this limit is around 3 monthly salaries in cash. Savings beyond that amount could be put to work with a long time horizon and in a diversified portfolio of low-cost instruments. In the long run, markets recover. So we have to be able to afford some patience.

What are the gender differences concerning financial risk-taking?

When it comes to financial decisions in the real world, such as the amount of equity versus bonds and other safe instruments in women’s investment portfolios, I do not have such data and I expect that it will vary widely from country to country, depending on factors such as wealth, financial education and agency in the household financial decision-making. However, the most powerful study I know of about economic preferences, a giant survey of over 80’000 participants from 76 countries conducted in 2012, shows that on average women are more risk averse than men by about one-fifth of a standard deviation. The participants were asked to both self-assess their willingness to take different types of risks and to play a series of gambles. Given the size of the sample, I trust it is close to representing the gender difference in actual preferences towards risk-taking, which could then affect investment decisions regardless of financial and educational circumstances.

The same survey also shows that around the globe, women are more altruistic than men and more likely to display positive reciprocity such as paying back a favor for a favor, and less likely to engage in negative reciprocity such as hurting someone back. This is unrelated to risk-taking but I would expect these preferences to also affect their financial choices.

How do women differ from men in their investment decisions in general?

There are surely many individual differences but we can learn something about gender differences from experimental market studies in which participants play in a mock stock exchange for several periods. These types of experiments show a remarkable difference between genders: women are more rational in that they stick to the fundamental value even when an internal manipulation in the game leads to the generation of a price bubble.

In a meta-analysis of such studies, it is clear that men-only games generate the largest price bubbles and women-only experiments the smallest. Mixed markets are somewhere in between. The biological mechanism behind this phenomenon has also been the subject of intense study. We know of two mechanisms that drive men’s optimism that women are biologically immune to: the testosterone-driven winner effect and the cortisol-driven “gotta catch up” response, both of which increase risk-taking.

I wish the real world could take a lesson from this finding – perhaps we could have prevented the last subprime mortgage crisis if at least half of the financial decision-makers were women?

But that’s experiments on young students whose brains may work differently than that of older, seasoned investors. It is very interesting to look at professionals, instead, to see whether these effects persist with higher financial education and experience. There, however, we have a problem finding a sufficiently large sample of women to study because of how few of them become professional traders. Some surveys from a few years ago showed that women are more efficient traders: they make fewer transactions to obtain the same profit margins as men.

Why do they seem to be more attracted to impact investing?

I think this has to do with how women value shared gains in comparison to selfish gains. Women derive more subjective utility, an economic term for subjective satisfaction, from sharing than men. Men enjoy keeping gains for themselves more than when they are shared. The same phenomenon is the reason why women give more to charity and are generally more generous – it is because, on average, for women giving feels more rewarding than for men. Laboratory studies from Zurich have demonstrated that the reasons are biological: when women’s dopaminergic neurons in the ventral striatum were temporarily inactivated, they decided to share money as often as men but when it was intact, they shared more often.

How could we increase the number of female startup investors?

I think women are motivated by contributing to something purposeful, to a greater good, and derive more satisfaction from seeing that their investments are used to help a just cause, grow their future legacy, or relieve human suffering. With such a motivation, the decision to invest is not just a financial decision but a decision to contribute to something meaningful that may also bring a financial return. In my opinion, the first thing that could be done is to reframe “investment” into “contribution” and emphasize the good that it will bring even if the financial returns fail to impress. Second, since women are more risk averse, speaking in terms of potential loss rather than “risk” may make it easier to imagine and engage. It may help understand how much loss they can handle and that it really wouldn’t be so bad given all the non-financial good this decision could bring. Assuming that the potential female investors are highly financially educated and have experience in financial risk-taking, they may still need a role model to legitimize that it is okay to take that risk. Seeing other women in this position can give confidence to feel legitimate as startup investors.